What happens to EBITDA if D&A increases by $10? So confused about EBITDA
Kind of confused about EBITDA because if we are excluding D&A, how come we add it back to EBIT to find EBITDA?
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If D&A increases by $10, EBITDA remains unchanged. Take this example:
Revenue = $100 Operating Expenses (Excluding D&A) = $50 D&A = $10 Let's assume $0 income taxes and $0 interest. Here, net income = $40 ($100 - $50 - $10) and EBITDA = $50 ($40 net income + $10 D&A)
Same scenario, but increase D&A by $10 Revenue = $100 Operating Expenses (Excluding D&A) = $50 D&A = $20 Net Income = $30 ($100 - $50 - $20) and EBITDA = $50 ($30 net income + $20 D&A)
Since we're backing depreciation and amortization expense out of our starting point (net income) then adding it back to EBITDA, it makes no difference if the number is $0 or $100 - it will always be added back at the same amount it was taken out.
How could we add it back if EBITDA is earning "before" D&A?
Your confusion is essentially coming from the difference between top-down and bottom-up EBITDA.
Starting with revenue? Don't subtract D&A so you exclude the impact of D&A on earnings.
Starting with earnings, which already subtracted D&A from revenues? Add D&A back so you reverse the impact.
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