How to Calculate EBITDA: A Step-by-Step Guide for Business Owners

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a key financial metric that gives business owners a clear picture of their company’s profitability and operational efficiency.

If you’re gearing up for an investor pitch, analyzing your business’s financial performance, or planning for future growth, knowing how to calculate EBITDA is essential for making informed decisions.

In this guide, we’ll break down how to calculate EBITDA with a step-by-step process, explain why it matters, and compare it to other financial metrics.

We will also explore how doola’s bookkeeping services can help you effortlessly track and optimize your EBITDA, ensuring your business stays financially healthy and investor-ready.

What Is EBITDA?

EBITDA is a key financial metric that measures a company’s profitability by stripping out the effects of financing, taxes, and non-cash expenses like depreciation and amortization.

By focusing solely on core operational performance, it allows business owners and investors to make apples-to-apples comparisons across companies and industries.

Learning how to calculate EBITDA is essential for assessing financial health, attracting investors, and making data-driven business decisions.

Why Is EBITDA Important?

For business owners and investors, EBITDA is a crucial financial metric that provides a clear picture of a company’s profitability by stripping away external financial factors.

Here’s why EBITDA is important:

1. Business Valuation: Investors and analysts rely on EBITDA to gauge a company’s true worth.

2. Financial Performance: It helps assess profitability without the impact of taxes, interest, or accounting decisions.

3. Investor Confidence: A strong EBITDA signals stability and financial health, attracting potential investors.

4. Benchmarking: It allows businesses to compare their financial performance within the same industry.

Let’s now understand how to calculate EBITDA with a step-by-step breakdown of its formula and methods.

How to Calculate EBITDA: Formula and Methods

Understanding how to calculate EBITDA is essential for business owners who want to assess profitability without the influence of financing, accounting decisions, or tax structures.

EBITDA helps standardize financial comparisons across companies, making it a valuable tool for investors and analysts.

The most widely used formula for calculating EBITDA is:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

This formula removes non-operating expenses to give a clearer view of a company’s core profitability.

Step-by-Step Guide: How to Calculate EBITDA with Example

To learn how to calculate EBITDA and measure business performance, you need to follow four simple steps.

Step 1: Start With Your Net Income

Begin with the company’s net income, also known as net profit, which represents the total earnings after all expenses (e.g., taxes, interest, depreciation, and amortization) have been deducted from the total revenue.

This is the bottom line of the income statement.

Step 2: Add Back the Interest

Since EBITDA isolates operational performance from financing costs, add back any interest expenses the company incurred. This step ensures that the metric reflects the business’s core profitability, regardless of its capital structure.

Step 3: Add Back Your Taxes

Include the taxes paid back into the net income. This adjustment removes the impact of tax strategies and rates, allowing you to focus solely on the company’s operating earnings.

Step 4: Add Back Depreciation and Amortization

Finally, add back depreciation and amortization, both of which are non-cash expenses. Depreciation accounts for the gradual expense of fixed assets, while amortization applies to intangible assets.

Including these expenses provides a clearer view of the company’s operational cash flow.

Executing the above steps helps assess your company’s core operational performance without the influence of financing or accounting decisions.

Let’s now break down how to calculate EBITDA with an example. Assume a company has the following financial details:

EBITDA Calculation:

EBITDA = $200,000 + $50,000 + $30,000 + $40,000 + $20,000 = $340,000

So, the company’s EBITDA is $340,000, reflecting its earnings before interest, taxes, depreciation, and amortization. This provides a clearer measure of its operational profitability, independent of external financial factors.

How to Calculate EBITDA Using an Alternative Method

Some businesses use an Operating Income-Based EBITDA Calculation, which starts with operating income instead of net income:

EBITDA = Operating Income +Depreciation + Amortization

If the company reports an operating income of $270,000, the EBITDA would be:

EBITDA = 270,000+40,000+20,000 = 330,000

This method is useful for businesses focusing on core operational performance rather than bottom-line net income.

Now that you understand how to calculate EBITDA, it’s crucial to track it consistently to make informed business decisions. However, manual calculations can be time-consuming and prone to errors.

With doola’s expert bookkeeping services, business owners can automate financial tracking, ensuring accurate EBITDA calculations without the hassle.

Get started with doola Bookkeeping today!

Adjusted EBITDA: When & Why to Use It

Adjusted EBITDA refines your standard EBITDA calculation by removing one-time or non-recurring expenses that can distort your bottom line.

This gives you a clearer picture of your business’s core profitability by focusing on its day-to-day operations, free from irregular financial events.

To calculate Adjusted EBITDA, follow these steps:

Step 1: Start with Standard EBITDA

First, calculate your EBITDA by adding back interest, taxes, depreciation, and amortization to your net income.

Step 2: Add Back Non-Recurring Expenses

Identify and add back any irregular or one-off expenses that impacted your financials during the period. This ensures your profitability reflects ongoing operations rather than temporary costs.

📌 Common Non-Recurring Expenses to Add Back

By calculating Adjusted EBITDA, you gain a more accurate measure of your operational profitability, making it easier to evaluate your business’s true financial health.

EBITDA vs. Other Financial Metrics

When evaluating your business’s financial health, it’s essential to understand how EBITDA compares to other key financial metrics.

While EBITDA offers a clear picture of profitability before financial costs and accounting practices, other metrics like net income, gross profit, and operating income reflect different aspects of a company’s performance.

The table below highlights the main differences between EBITDA and other financial metrics, helping you interpret how to calculate EBITDA and understand what each metric reveals about your business.

📌 Key Takeaway:

While EBITDA reflects operational profitability without factoring in financing and accounting decisions, metrics like net income reveal your business’s true bottom line after all expenses.

By analyzing these together, business owners gain a well-rounded view of financial performance.

How Business Owners Can Use EBITDA to Make Informed Decisions

Learning how to calculate EBITDA is essential for business owners; but it’s not enough. This powerful metric goes beyond basic profit figures, offering insights into operational efficiency and financial performance.

Here’s how business owners can use EBITDA to make smarter decisions:

1. Financial Analysis:

By tracking EBITDA over time, business owners can evaluate their company’s performance and profitability trends. This helps identify growth patterns, seasonal fluctuations, and areas needing improvement.

2. Investor Relations:

A strong EBITDA signals financial stability and operational strength, making your business more attractive to investors and lenders. It demonstrates consistent profitability, which builds confidence in your company’s growth potential.

3. Operational Efficiency:

Analyzing EBITDA allows you to spot inefficiencies and optimize expenses. For instance, if EBITDA margins are shrinking, it may indicate rising operational costs, prompting you to streamline processes.

4. Growth Strategies:

EBITDA trends can inform expansion plans and major financial decisions. For example, stable EBITDA growth may indicate readiness for scaling, acquiring new assets, or pursuing market expansion.

💡 doola Tip: Regularly monitoring EBITDA alongside other financial metrics gives you a 360-degree view of your business’s financial health, helping you make well-informed decisions.

Common Mistakes to Avoid When Calculating EBITDA

While EBITDA is a powerful financial metric, miscalculations or misinterpretations can lead to flawed financial analysis. To ensure you’re accurately assessing your company’s profitability, watch out for these common pitfalls:

❌ Ignoring Non-Recurring Costs

Failing to adjust for one-time or irregular expenses (e.g., lawsuit settlements, restructuring costs) can inflate or distort EBITDA, giving a misleading view of ongoing profitability.

❌ Overlooking Depreciation and Amortization

These non-cash expenses are essential components of EBITDA. Excluding or miscalculating them can result in an inaccurate representation of your financial performance.

❌ Confusing EBITDA with Cash Flow

EBITDA does not account for changes in working capital, such as accounts receivable or payable fluctuations. Relying on it alone can create false assumptions about liquidity.

❌ Misinterpreting High EBITDA

A strong EBITDA doesn’t automatically indicate financial health. High debt levels, poor cash flow, or unsustainable growth can still jeopardize long-term stability, despite a high EBITDA.

With doola’s bookkeeping services, you can always view EBITDA alongside other financial metrics like cash flow, net income, and debt levels for a more accurate and holistic view of your business’s financial standing.

Streamline Your Finances With doola Bookkeeping

Knowing how to calculate EBITDA is essential for accurately measuring your business’s profitability and making informed decisions. However, keeping your financial data organized and error-free can be a challenge, especially as your business scales.

That’s where doola Bookkeeping steps in with the following offerings:

1. All-in-One Financial Management: From tracking expenses to generating tax-ready reports, doola handles it all, giving you a clear picture of your business’s financial health.

2. Monthly Bookkeeping Services: Stay on top of your finances with consistent, accurate reporting; no more messy records or last-minute scrambles.

3. Expert Guidance for Smarter Decisions: Get access to professional financial insights that help you optimize your EBITDA and make strategic moves with confidence.

Whether you’re calculating EBITDA to attract investors, forecast growth, or streamline financial reporting, doola’s All-in-One Accounting services ensure your data is precise, reliable, and ready for strategic decision-making.

Book a demo with us and take your business finances to the next level!

FAQs: How to Calculate EBITDA

What are common adjustments made in adjusted EBITDA?

Common adjustments include non-recurring legal fees, stock-based compensation, restructuring costs, and extraordinary gains or losses.

Can EBITDA be negative, and what does that indicate?

Yes, a negative EBITDA indicates that a company is operating at a loss before considering financial costs and taxes. This can be a warning sign for financial instability.

How do startups and small businesses benefit from tracking EBITDA?

EBITDA helps startups and small businesses gauge profitability, attract investors, and evaluate financial performance without distortions from taxes and interest expenses.

What are some common pitfalls when calculating EBITDA?

Mistakes include ignoring non-recurring expenses, confusing EBITDA with cash flow, and overestimating profitability without considering debt levels.

How can doola Bookkeeping help in managing and understanding EBITDA?

doola Bookkeeping provides automated tracking, expert financial insights, and seamless reporting to help business owners manage EBITDA efficiently.