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
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.