How EBITDA is calculated
The usual formula starts at the bottom of the income statement: net profit plus interest, plus income tax, plus depreciation and amortization. Each add-back removes a cost that depends on financing, tax position or past asset purchases rather than on day-to-day trading.
Only the right items belong in the add-backs. Interest on short- and long-term debt is added back, but other kinds of interest are not, such as interest connected with accounts receivable. Only income tax is added back, not property, payroll or sales taxes. A line-by-line breakdown of your income statement makes this easier.
A worked example
For illustration, a business reports net profit of $50,000. It paid $10,000 of interest on a term loan, $15,000 of income tax, and recorded $20,000 of depreciation and amortization. EBITDA is $50,000 plus $10,000 plus $15,000 plus $20,000, or $95,000.
With revenue of $500,000, the EBITDA margin, which is EBITDA divided by revenue, is 19%. These figures are round and illustrative only. The business has not necessarily generated $95,000 of spendable cash, because loan payments, tax, equipment purchases and working capital needs still have to be funded.
Why people ask for it, and where it misleads
Business owners, valuators and bankers use EBITDA to compare companies in the same industry and to estimate how much operating earnings are available to support debt. A buyer may apply a multiple to EBITDA when valuing a business, and a lender may set a debt coverage condition tied to it. The multiple and the condition vary with the industry and the deal.
EBITDA is not profit, and it ignores real costs. A business that must keep replacing equipment still pays for it in cash even though depreciation is added back. Interest and tax are genuine obligations too. Operating income is usually a stricter view, because depreciation and amortization are generally included in operating expenses.
What to discuss with your accountant
If a bank or buyer asks for EBITDA, ask which definition they use. Some adjust for owner pay, one-time items or related-party costs, and those adjustments should be documented rather than assumed.
Also ask how depreciation and amortization were calculated in your books, whether your interest line separates business debt from other interest, and whether the statements are complete and reconciled. Bring your latest income statement, loan statements and a schedule of capital purchases.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.