What Is EBITDA and How Is It Calculated? Formula With a Worked Example

What is EBITDA and how is it calculated? Come results season, it’s one of the first things new investors want to know. Indian companies love to lead their press releases with EBITDA, and TV anchors throw around “EBITDA margin” as though everyone grew up with the term.

Here we break the idea down in plain language, go through both formulas, run a simple rupee example and point out where EBITDA can lead you astray.

In this article

1. What is EBITDA?
2. What is EBITDA and how is it calculated in practice? The two formulas
3. A worked example in rupees
4. EBITDA margin: the number analysts really watch
5. Why investors use EBITDA
6. A quick EV/EBITDA illustration
7. The limits of EBITDA
8. EBITDA vs EBIT vs PAT
9. How to use EBITDA when reading Q2 results
10. Common mistakes beginners make
11. Frequently asked questions
12. Key takeaways

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation.

In Investopedia‘s words, EBITDA measures a company’s operating performance before financing costs, taxes and certain non-cash accounting charges.

Strip away the jargon and it’s trying to answer a single question. How much does the core business earn from its operations, before you factor in how it’s funded, how it’s taxed and how it accounts for investments made years ago?

There’s a reason each item gets left out:

• Interest comes down to how much debt a company carries. Two firms with identical factories can have very different interest bills simply because one borrowed and the other raised equity.
• Taxes hinge on tax laws, incentives and past losses, not only on how well the business is run.
• Depreciation spreads the cost of physical assets like machines and buildings across their useful life. It’s an accounting charge, not cash going out that quarter.
• Amortisation does the same job for intangible assets such as licences, software or acquired brands.

EBITDA tells you how well the engine runs. It doesn’t tell you how much fuel the engine burns or how much the car still owes the bank.

What is EBITDA and how is it calculated in practice? The two formulas

According to Investopedia, you get EBITDA by adding interest, taxes, depreciation and amortisation back to either net income or operating income. So there are two roads to the same number.

Formula 1: Starting from net profit

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortisation

This one is useful when you’re reading a profit and loss statement from the bottom up. Begin with net profit and add each item back.

Formula 2: Starting from operating profit (EBIT)

EBITDA = Operating profit (EBIT) + Depreciation + Amortisation

Interest and tax are already out of EBIT, so all you add back are the non-cash charges.

A third shortcut used in Indian results

A lot of Indian P&L statements don’t carry an “EBIT” line at all. So analysts tend to work from the top down:

EBITDA = Revenue from operations − Operating expenses (raw materials, employee costs and other expenses, excluding finance cost and depreciation)

Watch whether “other income”, things like treasury gains or interest on cash, has crept in. Most analysts keep it out so EBITDA reflects only the core business.

A worked example in rupees

Let’s use a made-up company, ABC Ltd. The figures below are illustrative only and don’t belong to any real company.

Item (Rs crore)	Amount
Revenue from operations	1,000
Raw material cost	550
Employee cost	120
Other expenses	130
Depreciation and amortisation	50
Finance cost (interest)	30
Other income	10
Tax	40

Step 1: Operating expenses. 550 + 120 + 130 = Rs 800 crore.

Step 2: EBITDA. 1,000 − 800 = Rs 200 crore.

Step 3: EBIT. 200 − 50 = Rs 150 crore.

Step 4: Profit before tax. 150 − 30 + 10 = Rs 130 crore.

Step 5: Net profit. 130 − 40 = Rs 90 crore.

Now run it through Formula 1: 90 + 30 + 40 + 50 = Rs 210 crore. Why Rs 10 crore more? Because net profit had Rs 10 crore of other income baked in. Remove it and you’re back at Rs 200 crore.

That little gap is the usual reason two websites show slightly different EBITDA for the same company. Always check whether other income is in or out.

EBITDA margin: the number analysts really watch

EBITDA margin = EBITDA ÷ Revenue from operations × 100

For ABC Ltd, that comes to 200 ÷ 1,000 × 100 = 20%.

Why does the margin matter so much? It lets you compare a company with its own past, and with peers of very different sizes. Say ABC grows revenue 15% next year but its margin slides from 20% to 17%. Costs rose faster than sales. Headline revenue looks fine, but that’s a warning sign.

Results coverage usually talks about margin changes in basis points. One basis point is 0.01 percentage point, so going from 20% to 18.5% is a 150 basis point contraction.

Revenue growth gets the headlines, but margin direction often moves the stock price on results day.

Why investors use EBITDA

• Peer comparison: with debt and tax differences stripped out, comparing two cement or two telecom companies becomes fairer.
• Capital-heavy sectors: telecom, power, metals and infrastructure carry huge depreciation. EBITDA tells you whether the operations underneath are healthy.
• Valuation: the EV/EBITDA multiple (enterprise value divided by EBITDA) is used everywhere. Unlike the P/E ratio, it accounts for debt as well as equity.
• Debt capacity: lenders often look at net debt to EBITDA to judge how many years of operating earnings it would take to pay off borrowings.

A quick EV/EBITDA illustration

Back to ABC Ltd. Assume a market capitalisation of Rs 2,000 crore, debt of Rs 300 crore and Rs 100 crore of cash. Enterprise value (EV) is 2,000 + 300 − 100 = Rs 2,200 crore.

With annual EBITDA of Rs 200 crore, EV/EBITDA is 2,200 ÷ 200 = 11 times. Once more, these numbers are only illustrative.

A multiple below similar peers can hint that the stock is cheaper. It can just as easily mean the market expects slower growth. Use the multiple to start asking questions, not to reach a verdict.

The limits of EBITDA

EBITDA is handy, but it isn’t cash and it isn’t profit. Investopedia cautions that because it leaves out capital costs, EBITDA can make companies look more profitable than they really are. It also points out that the US SEC requires companies to reconcile EBITDA to net income when they report it.

A few caveats to keep in your head:

• Depreciation is a real cost over time. Machines wear out and have to be replaced. A company with high EBITDA and heavy ongoing capex may generate very little free cash.
• Interest must be paid. A heavily indebted company can post strong EBITDA and still struggle to service its loans.
• Working capital is ignored. If receivables and inventory keep piling up, the cash may never arrive, however good EBITDA looks.
• It’s not a standard accounting measure. Companies can define “adjusted EBITDA” their own way and drop items they call one-off. Read the footnotes.
• It doesn’t suit banks and NBFCs. For lenders, interest is the business. Analysts look at net interest income, NIM and asset quality instead.

EBITDA vs EBIT vs PAT

Measure	What is excluded	Best used for
EBITDA	Interest, tax, depreciation, amortisation	Operating strength, peer comparison, EV/EBITDA
EBIT	Interest, tax	Operating profit after the cost of assets
PBT	Tax	Profit after funding costs
PAT (net profit)	Nothing	Earnings per share, P/E ratio, dividends

How to use EBITDA when reading Q2 results

1. Pull revenue from operations and total expenses from the results PDF on the NSE or BSE website.
2. Work out EBITDA yourself instead of leaning only on the company’s press release.
3. Calculate the margin and set it against the same quarter last year (year-on-year) and the previous quarter (quarter-on-quarter).
4. Ask what drove the change. Raw material prices, employee costs or pricing power?
5. Then go down the P&L to see how depreciation, interest and tax shaped the final profit.
6. Cross-check with cash flow in the half-yearly statements to see whether EBITDA is actually turning into cash.

Common mistakes beginners make

• Treating EBITDA as cash in hand.
• Comparing EBITDA margins across unrelated sectors. Software and retail run on structurally different margins.
• Using EBITDA for banks and finance companies.
• Missing the “adjusted” items that make EBITDA look better.
• Judging from one quarter alone. Seasonality can distort any single quarter.

Frequently asked questions

Is higher EBITDA always better?

Not by itself. Check margin trends, debt, capex and cash flow before you draw any conclusions.

Can EBITDA be negative?

Yes. Negative EBITDA means operating costs are higher than operating revenue, which you’ll often see in early-stage or loss-making businesses.

Where do I find the numbers?

Listed companies file their quarterly results with the stock exchanges, and the profit and loss statement has every line you need. For learning to read these statements, Zerodha Varsity’s fundamental analysis module is a good free resource.

Key takeaways

• EBITDA = net profit + interest + tax + depreciation + amortisation, or EBIT + depreciation + amortisation.
• The EBITDA margin shows how much operating profit each rupee of sales brings in.
• It works best for comparing operations across companies with different debt and tax profiles.
• It isn’t cash, and it can flatter capital-heavy or debt-heavy businesses.
• Always read it next to net profit, debt and cash flow.

Ready to try it? Our step-by-step guide on how to analyse quarterly results of a company shows the process, and you can practise on the companies in Q2 results this week.

This article is for educational purposes only and is not investment advice.