EBITDA is earnings before interest, tax, depreciation and amortisation. In practice it is operating profit with the two non-cash charges added back, and the EBITDA margin expresses that figure as a percentage of revenue. The purpose is to approximate the cash profit of trading without the distortion of how assets were bought or how quickly they are being written down.
The difference from operating margin is exactly the depreciation and amortisation load, and it is not a small difference in capital-intensive businesses. A manufacturer with heavy plant or a company carrying acquired intangibles can show an EBITDA margin many points above its operating margin, and the gap is a genuine cost even if it is not a cash payment this year. Assets do wear out, and eventually they have to be replaced out of cash.
Treat published EBITDA with care. Because it is not defined by accounting standards, companies adjust it freely, and "adjusted EBITDA" frequently strips out restructuring, share-based payments and other recurring items. On the sample figures EBITDA is $630,000, a 19.7% margin, against an operating margin of 11.2% — the 8.4 point gap is the $270,000 of depreciation and amortisation.
The formula
Revenue- Sales for the period
Operating expenses- Overhead including the depreciation and amortisation charge
D&A- Depreciation and amortisation, added back
Multiple- EV/EBITDA multiple used for the implied valuation
How to use this calculator
- Enter revenue and cost of goods sold for the period.
- Enter operating expenses as reported, including depreciation and amortisation.
- Enter the depreciation and amortisation charges so they can be added back.
- Set an EV/EBITDA multiple if you want the implied enterprise value.
Worked examples
A manufacturer on $3,200,000 of revenue
Operating profit is $360,000, an 11.25% margin. Adding back $210,000 of depreciation and $60,000 of amortisation gives EBITDA of $630,000 and a margin of 19.69%.
What the multiple does
At 6× the implied enterprise value is $3,780,000. Because the multiple applies to EBITDA rather than to profit, every $10,000 of cost removed is worth $60,000 of enterprise value — which is precisely why sellers argue so hard about add-backs.
How to read your score
Frequently asked questions
What is the difference between EBITDA and operating profit?
Operating profit deducts depreciation and amortisation; EBITDA adds them back. The gap is the non-cash charge for assets already bought, so it is largest in capital-intensive businesses.
Is EBITDA the same as cash flow?
No. It ignores working capital movements, capital expenditure, interest and tax, all of which are real cash. A business can grow EBITDA while consuming cash if it is funding stock and debtors or replacing plant.
Why is EBITDA used for valuation?
Because it is comparable across companies with different debt levels, tax positions and asset ages. That is also its weakness: two businesses with the same EBITDA can need very different amounts of capital expenditure to stand still.
What should I make of "adjusted EBITDA"?
Read the adjustments. Removing a genuine one-off is reasonable; removing the same restructuring charge every year, or share-based pay that recurs indefinitely, is not.
EBITDA reference
| Operating margin | D&A 2% of revenue | D&A 4% of revenue | D&A 8% of revenue | D&A 12% of revenue | D&A 20% of revenue |
|---|---|---|---|---|---|
| 2% EBIT | 4% | 6% | 10% | 14% | 22% |
| 5% EBIT | 7% | 9% | 13% | 17% | 25% |
| 11% EBIT | 13% | 15% | 19% | 23% | 31% |
| 18% EBIT | 20% | 22% | 26% | 30% | 38% |
| 25% EBIT | 27% | 29% | 33% | 37% | 45% |
EBITDA margin is the operating margin plus depreciation and amortisation as a share of revenue.
| EBITDA margin | EBITDA | EV at 4× | EV at 6× | EV at 9× |
|---|---|---|---|---|
| 5% | $160,000 | $640,000 | $960,000 | $1,440,000 |
| 10% | $320,000 | $1,280,000 | $1,920,000 | $2,880,000 |
| 15% | $480,000 | $1,920,000 | $2,880,000 | $4,320,000 |
| 20% | $640,000 | $2,560,000 | $3,840,000 | $5,760,000 |
| 25% | $800,000 | $3,200,000 | $4,800,000 | $7,200,000 |
| 35% | $1,120,000 | $4,480,000 | $6,720,000 | $10,080,000 |
Multiples are illustrative; a point of margin is worth several times its own value once a multiple is applied.