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Peoples State Bank

Using EBITDA to Calculate Your Company’s Value

Focusing on Your Operating Decisions
  • Business
  • December 05, 2019
  • Seth Wage

There are many methods to calculate a company’s value. Financial institutions often use EBITDA, which is short for Earnings Before Interest, Taxes, Depreciation, and Amortization. The benefit for using EBITDA is it is a measure of profits, without factoring in financing decisions, accounting decisions, and tax environments.

EBITDA allows analysts to focus on the outcome of operating decisions while excluding the impacts of non-operating decisions like interest expenses, tax rates, or large non-cash items like depreciation and amortization. By minimizing the non-operating effects that are unique to each company, EBITDA allows analysts to focus on operating profitability as a singular measure of performance. This is important when comparing similar companies across a single industry, or companies operating in different tax brackets.

To calculate your company’s EBITDA, start by reviewing your company’s income statement. We’ll use a fictional company to demonstrate.

Company ABC’s Annual Income Statement

Revenue                                                          $2,000,000

Operating Expenses

            Salaries                                               ($1,000,000)

            Rent                                                    ($500,000)

            Amortization                                        ($25,000)

            Depreciation                                        ($75,000)

Operating Income                                             $400,000

Interest Expense                                              ($50,000)

Net Income                                                                $350,000

In this example, it’s easy to see the first half of the EBITDA calculation by looking at the operating income line, which shows $400,000 for Company ABC. Then, add back in the depreciation expense of $75,000 and the amortization expense of $25,000, which means the EBITDA for Company ABC is $500,000. 

You could also start from the bottom of this example, adding interest, depreciation, and amortization to the net income amount of $350,000, getting you back to the $500,000 EBITDA figure.

Seth Wage
  • Commercial Banker

Seth is an experienced banker working with business customers at Peoples State Bank. Seth meets and works with customers to help them with their banking needs.