I dont really get EBITDA. It is earnings before all that so I assumed that it contained D and A. but if it excludes D and A, how can we subtract D and A to get Ebit? Wouldnt that be subtracting a non existent thing? Thanks!

The incoming statement isn't the process of piling stones, it's the process of chipping away at a boulder. EBITDA is earnings before all that other stuff is EXPENSED-OUT, not before it is ADDED-IN (as your way of framing it seems to imply).

Therefore, the non-cash amount you deduct from topline for D&A is still included in EBITDA, before later being removed to arrive at your EBIT.

That being said, it's best to think of the two from the reverse direction. D&A are pretty typical operating expenses on the income statement and EBIT ("Operating Income") is a common metric as well, therefore it might be easier for beginners to think of EBITDA as EBIT with the D&A added-back, not EBIT as EBITDA with the D&A subtracted-out (although they are obviously mathematically identical).

“Millionaires don't use astrology, billionaires do”

^^^HAHA!

Beat you by some few number of seconds!

EDIT: Someone deleted their post right after I posted this one, haha.

“Millionaires don't use astrology, billionaires do”

Ah ic, so did Investopedia make a mistake? I was reading this:

Definition of 'EBITDA Margin':

A measurement of a company's operating profitability. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. Because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability.

"Because EBITDA excludes depreciation and amortization," Is this phrase then a big mistake?

"Because EBITDA excludes depreciation and amortization," Is this phrase then a big mistake?

No, it's correct. The two are EXPENSES (negatives), therefore their exclusion implies that value is retained.

When I said they were included, I was referring to their value, which hadn't been deducted yet.

“Millionaires don't use astrology, billionaires do”

So if I understand correctly,

1) EBITDA doesn't actually contain D&A.

2) D&A are negative in sign so that is why EBITDA - D&A = EBIT since I can do this:

EBITDA - (-D&A) = EBITDA +D&A = EBIT (ASSUMING D&A were positive for the sake of argument)

3) Therefore EBIT CONTAINS D&A.

Are my three conclusions from what you guys said correct? Thank you so much!

Use of EBITDA in Banking (Originally Posted: 02/14/2007)

Why is EBITDA used in many groups as a proxy for cash flow from operations and performance? In adding back D&A doesn't that obscure the costs, albeit non-cash, borne by companies in generating their revenue? In the telecom sector, for example, EBITDA would probably not mirror CFO given the high levels of D&A.

you mentioned the answer yourself, its a proxy for cash flow not profitability.

you can have profitable companies that end up going into bankruptcy cause they can't manage cash flow. EBITDA just serves as a quick proxy for that.

each industry uses industry-specific metrics.

Colonel_Sanders:
D&A is already factored into the SG&A line item?

Cuz otherwise it doesnt make sense to me why add D&A into EBIT.

D&A may be either included in SG&A or broken out separately - but obviously, D&A has been removed by the time you reach EBIT.

That's why Buffett uses Owner earnings:

If we think through these questions, we can gain some insights about what may be called "owner earnings." These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) .

http://www.berkshirehathaway.com/letters/1986.html

Buffett at 2002 annual meeting:

It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

We won't buy into companies where someone's talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don't, I suspect you'll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft -- they'll never use EBITDA in their annual report.

People who use EBITDA are either trying to con you or they're conning themselves. Telecoms, for example, spend every dime that's coming in. Interest and taxes are real costs.

Depreciation and Amortization are non-cash items, so there is no physical cash lost when accounting for these items - they are added back because you're assessing how much cash you have on hand, not your accounting profit.

In the case you have high Dep and Amortization, you generally have high capex, so the best thing to do is to calculate free cash flow and take out some level of maintenance capex (which would be high in telecoms) and then get a free cash flow amount. That's the difference between Cash flow from operations on the statement and calculating 'free cash.'

The real purpose of EBITDA is as a proxy for unlevered FCF.

Basically with EBITDA, D&A, an assumption around maintenance capex and working capital you have a DCF model. Since EBITDA should be used in a multiples based approach to comparable businesses these additional numbers should be very similar. Thus regardless of the chosen capital structure you can compare a business and see how it is valued on a TEV basis.

Some businesses don't trade on EBITDA, it may be completely useless. REITs trade on FFO and cap rates, many businesses trade on PE multiples, you can value power plants on a \$/MW, and so on.

In general each sector has its own relevant multiple and you should apply it. Warren Buffet saying that companies that dress up their statements with it is a little snide an naive, mostly because thats only the case for companies where it isn't a relevant metric. Don't look at EBITDA for a telecom, or any obscenely high capex business. Likewise don't look at yield for a telecom.

Put some thought into how a sector can be compared on an apples to apples basis and use that.

--There are stupid questions, so think first.

Except you're all missing the big picture as well.

The big reason to strip out D&A, Taxes, Interest, which are all real costs, is that those are non-operations costs. Senior management of a company can easily change those numbers in a quarter by changing around the balance sheet. EBITDA gets to the true operations of a company.

EBITDA, theoretically at least, gets to the fundamentals of a business. When you try to compare how well run Company A versus Company B is, who the hell uses net income margins?

nystateofmind:
I don't think anybody's missing the big picture.

I think most ppl here understand the reasons for using EBITDA as a proxy for FCF, but the question then becomes why use the proxy? It's quick and dirty.

That still doesn't make it a great proxy for FCF. There are much better ways to come up w/ FCFF.

Agree wholeheartedly.

Very surprising how many responses have been posted to such a basic question.

Isn't EBITDA a good proxy because it exhibits the capital structure a company can support? Since it shows Earnings without Interest, Taxes, D&A, it exhibits the level of leverage a firm can sustain and thus shows the potential/performance of the company stripping away the effect of the current capital structure?

calculating EBITDA - Process of modeling (Originally Posted: 09/12/2011)

I have a quick question for a generous mentor.
I'm in a process of modeling, and I am confused about EBITDA calculation.
So I'm trying to add depreciation onto EBIT to reach EBITDA value, but I find two different depreication numbers, one under Indirect Expenses and another under G&A expenses (two different values). Which, if not both, do I add onto EBIT for EBITDA?

Unfortunately, it's not even a public company and the only financial information is the P&L statements (hence no notes).

The P&L statement is in a format of:
Total Sales
- Direct Expenses
- Indirect Expense (Depreciation is one of the indirect expenses)
= Gross Profit
- G&A Expenses (another Depreciation expense here)
= Income from Operations

So I assume the company just separated Depreciation into two sections for whatever purpose it may serve? Which means I would need to add the sum of the two values in order to get EBITDA?

is there no Cash Flow statement? If so, use depreciation from there as it should be the aggregate of all depreciation for the period, regardless of where it is hidden in the P&L. Also, if you have a BS (that is comparative between two periods) and no CFS, then you can construct the CFS using just the BS and the IS.

“I’m the guy doing my job. You must be the other guy.”

EBIT vs EBITDA (Originally Posted: 07/11/2012)

Why is EBIT considered a better proxy for cash flow than EBITDA in industries where depreciation/capex is very large? E.g. retail (when businesses own the property), areospace etc.

Or am I completely wrong?

So basically what this means is that EBITDA does contain D&A intrinsically but I haven't subtracted it out yet. So its like "Earnings before TAKING INTO ACCOUNT INTEREST TAXES, D&A"?

because D&A (mostly just the D) is not discretionary, the company must spend atleast that amount or close to it to keep the business steady-state (not grow) otherwise they will see it in their sales decreasing or other factors, you may be able to get away with it for a year or two but it will def catch up. So the don't really have that cash it is a required payment (capex) and it is very large and a huge use of cash that is pretty predictable.

let's use this example, where we want to determine an appropriate proxy for free cash flow. FCF = net operating profit after tax + depreciation - capex. (ignore changes in working capital/deferred taxes/etc for now).

in an industry that requires high capex, FCF would be NOPAT + dep - capex. if you assume capex is roughly equal to depreciation (in order to replenish the depreciated assets) then EBIT is a good proxy for cash flow.

in an industry that requires minimal capex, FCF would still be NOPAT + dep - capex... but capex is essentially zero, thus making EBITDA a better proxy for cash flow.

at the end of the day, determining cash flow is pretty fucking straightforward.. that said, i personally hate when people look at EBIT/EBITDA as a proxy for cash flow. but i think the above should answer your question.

oR3DL1N3o:

at the end of the day, determining cash flow is pretty fucking straightforward.. that said, i personally hate when people look at EBIT/EBITDA as a proxy for cash flow. but i think the above should answer your question.

Charlie Munger: "ebitda is just a way of saying bullshit earnings"

It's bullshit cash flow too!

I hate victims who respect their executioners

oR3DL1N3o:
let's use this example, where we want to determine an appropriate proxy for free cash flow. FCF = net operating profit after tax + depreciation - capex. (ignore changes in working capital/deferred taxes/etc for now).

in an industry that requires high capex, FCF would be NOPAT + dep - capex. if you assume capex is roughly equal to depreciation (in order to replenish the depreciated assets) then EBIT is a good proxy for cash flow.

in an industry that requires minimal capex, FCF would still be NOPAT + dep - capex... but capex is essentially zero, thus making EBITDA a better proxy for cash flow.

at the end of the day, determining cash flow is pretty fucking straightforward.. that said, i personally hate when people look at EBIT/EBITDA as a proxy for cash flow. but i think the above should answer your question.

So would you also prefer to look at a P/E ratio compared to a P/FCF ratio in a fundamental value investing analysis? Is there something you dislike about EBIT/EBITDA in general or just as a proxy for FCF?

Thanks.

What i've never understood is why people are always looking for a proxy. Just fucking calculate it you lazy bitch, it's not that hard to get a rough idea.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper

Oreos:
What i've never understood is why people are always looking for a proxy. Just fucking calculate it you lazy bitch, it's not that hard to get a rough idea.

EBIAT + D&A - Change NWC - CapEx...pretty straightforward.

I guess a proxy is good for back-of-the-envelope analyses.

Lol you dont understand accrual vs cash accounting if you think you should just calculate FCF.

What is the purpose of having an income statement if all you want is cash? give it a shot and i'll post the answer..

couchy:
Lol you dont understand accrual vs cash accounting if you think you should just calculate FCF.

What is the purpose of having an income statement if all you want is cash? give it a shot and i'll post the answer..

You've misinterpreted / misread what I've said and I've never stated that there isn't a need for the IS. What I'm saying is why have a proxy (cash flow in this cash) for a metric when that metric is easily obtainable. If you're looking for a smoothed number, do the work, make one.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper

couchy:
I guess a good follow up question is why people would look at ex-cash PE multiples?

I thought this is useful to know what the multiple would look like if you know a company is planning on using a lot of its cash to buy back shares

EBIT vs. EBITDA (Originally Posted: 07/24/2013)

Okay so this kid I was with yesterday is trying to tell me how EBIT is a better measure of Cash Flow than EBITDA... His reasoning was something with CapEx, but I cant remember.

How does this make sense? CapEx is not included in EBIT or EBITDA, and my logical response back to him was that D&A is indirectly correlated with CapEx right? So if company A has a lot more CapEx than company B, company A will also have more D&A than company B, correct?

I always thought EBITDA was a good measure of cash generated from operations, although not perfect because Operating Cash Flow would probably be better considering it factors in changes in Net Working Capital. Do you guys think this guy meant to say FCF, which is probably the best measure of cash flow considering it factors in the amount of CapEx that a company may have purchased, AND changes in Net Working Capital?

Any responses on this would help. That is what makes sense to me, but I have no clue how EBIT would be a better measure of cash from operations than EBITDA...

"An investment in knowledge pays the best interest." - Benjamin Franklin

Thank you for wasting my time. I have read this before, hence why I reiterated just about every main point from it.

My question is not touched in that article. I am asking if people think this kid is right by saying EBIT is a BETTER measure of CF than EBITDA... Dude I understand they are both not perfect, and in my opinion, if you want to measure CF, than FCF or OCF would be best because they factor in things like I said (and the article said) such as NWC and CapEx. Not the point.

Wondering if anyone could provide some feasible reasoning on why this guy is trying to tell me in pure terms between EBIT and EBITDA (Forget about the rest), that EBIT is a better measure of operating CF... Does not make any sense to me.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Yes-see the link above but I would add a distinction that no one mentioned in that thread:

It really depends on to what extent the D&A is a cash expense. Think about the depreciation in say, a hotel. That to me is more or less a cash expense because as your mattresses, lamps, signage, whatever is becoming more obsolete, you must constantly reinvest in PP&E (capex) just to maintain your level of service. This is "maintenance capex" and should be backed out of EBITDA to give a better sense of cash flow because without spending this money you would likely see earnings (and cash flow) drop. But, in the case of a piece of intellectual property that is being amortized, that is an entirely different story as there is no real cash cost even as the carrying value drops.

You will find that a lot of people don't like EBITDA as a proxy for cashflow because it can certainly be misleading as a measure of liquidity and does not factor in changes in working capital (among other reasons) but I think that it is most important to remember literally what you are measuring E-B-I-T-D-A and think about each item that is being ommitted or added back. Long story short, both you and your friend are kind of wrong-I'd argue (EBITDA-Maint. Capex) is useful but also not to be confused with FCF.

cheese86:

Yes-see the link above but I would add a distinction that no one mentioned in that thread:

It really depends on to what extent the D&A is a cash expense. Think about the depreciation in say, a hotel. That to me is more or less a cash expense because as your mattresses, lamps, signage, whatever is becoming more obsolete, you must constantly reinvest in PP&E (capex) just to maintain your level of service. This is "maintenance capex" and should be backed out of EBITDA to give a better sense of cash flow because without spending this money you would likely see earnings (and cash flow) drop. But, in the case of a piece of intellectual property that is being amortized, that is an entirely different story as there is no real cash cost even as the carrying value drops.

You will find that a lot of people don't like EBITDA as a proxy for cashflow because it can certainly be misleading as a measure of liquidity and does not factor in changes in working capital (among other reasons) but I think that it is most important to remember literally what you are measuring E-B-I-T-D-A and think about each item that is being ommitted or added back. Long story short, both you and your friend are kind of wrong-I'd argue (EBITDA-Maint. Capex) is useful but also not to be confused with FCF.

Thank you for this. So where exactly can you find that maintenance CapEx that you are talking about, because I have never seen that before. What other type of companies would this apply for? Also, can't it be assumed that really any company that had a lot of D&A must increase CapEx to maintain their level of efficiency as you noted or no?

"An investment in knowledge pays the best interest." - Benjamin Franklin

StudentLoanBackedSecurities:

cheese86:

Yes-see the link above but I would add a distinction that no one mentioned in that thread:

It really depends on to what extent the D&A is a cash expense. Think about the depreciation in say, a hotel. That to me is more or less a cash expense because as your mattresses, lamps, signage, whatever is becoming more obsolete, you must constantly reinvest in PP&E (capex) just to maintain your level of service. This is "maintenance capex" and should be backed out of EBITDA to give a better sense of cash flow because without spending this money you would likely see earnings (and cash flow) drop. But, in the case of a piece of intellectual property that is being amortized, that is an entirely different story as there is no real cash cost even as the carrying value drops.

You will find that a lot of people don't like EBITDA as a proxy for cashflow because it can certainly be misleading as a measure of liquidity and does not factor in changes in working capital (among other reasons) but I think that it is most important to remember literally what you are measuring E-B-I-T-D-A and think about each item that is being ommitted or added back. Long story short, both you and your friend are kind of wrong-I'd argue (EBITDA-Maint. Capex) is useful but also not to be confused with FCF.

Thank you for this. So where exactly can you find that maintenance CapEx that you are talking about, because I have never seen that before. What other type of companies would this apply for? Also, can't it be assumed that really any company that had a lot of D&A must increase CapEx to maintain their level of efficiency as you noted or no?

Cash flow statement will have CapEx, then you'll have to go to the related note to try and figure out how much is maintenance vs. growth. Some companies break it out and some don't. For the ones that don't, you'll have to read the earnings transcripts or estimate based on industry averages and historical trends.

StudentLoanBackedSecurities:

Thank you for wasting my time. I have read this before, hence why I reiterated just about every main point from it.

My question is not touched in that article. I am asking if people think this kid is right by saying EBIT is a BETTER measure of CF than EBITDA... Dude I understand they are both not perfect, and in my opinion, if you want to measure CF, than FCF or OCF would be best because they factor in things like I said (and the article said) such as NWC and CapEx. Not the point.

Wondering if anyone could provide some feasible reasoning on why this guy is trying to tell me in pure terms between EBIT and EBITDA (Forget about the rest), that EBIT is a better measure of operating CF... Does not make any sense to me.

EBITDA is a better measure and should match up to operating CF from an earnings quality perspective.

StudentLoanBackedSecurities:

cheese86:

Yes-see the link above but I would add a distinction that no one mentioned in that thread:

It really depends on to what extent the D&A is a cash expense. Think about the depreciation in say, a hotel. That to me is more or less a cash expense because as your mattresses, lamps, signage, whatever is becoming more obsolete, you must constantly reinvest in PP&E (capex) just to maintain your level of service. This is "maintenance capex" and should be backed out of EBITDA to give a better sense of cash flow because without spending this money you would likely see earnings (and cash flow) drop. But, in the case of a piece of intellectual property that is being amortized, that is an entirely different story as there is no real cash cost even as the carrying value drops.

You will find that a lot of people don't like EBITDA as a proxy for cashflow because it can certainly be misleading as a measure of liquidity and does not factor in changes in working capital (among other reasons) but I think that it is most important to remember literally what you are measuring E-B-I-T-D-A and think about each item that is being ommitted or added back. Long story short, both you and your friend are kind of wrong-I'd argue (EBITDA-Maint. Capex) is useful but also not to be confused with FCF.

Thank you for this. So where exactly can you find that maintenance CapEx that you are talking about, because I have never seen that before. What other type of companies would this apply for? Also, can't it be assumed that really any company that had a lot of D&A must increase CapEx to maintain their level of efficiency as you noted or no?

Yes-theoretically CapEx and D&A should ebb and flow together (not necessarily matched by year though) so if you see D&A of 2x Capex for several years you may become concerned that they are underinvesting in order to show better free cash flow. And, as was said above-maintenance Capex is not always explicitly laid out but you can back into it by reading transcripts and looking at what they spent in 08-09 (likely minimum or maintenance level).

You obviously have a hard time understanding the logic, which is ok if you are new to finance ( I was like that too). Just keep on looking at examples and eventually it will fall into place. Your last statement was correct.

EBITDA is basically your real operating earnings or revenue minus operating expenses = how much you get after only operating costs and before selling and administrative. This number will include non cash expense (D&A), interest expenses, taxes, non recurring and one time items such as restructuring expenses. That is why it is thought of as proxy for cash flow (although it does not take into account working capital). Also sometimes your operating expense will include D&A. In this case, when you take revenue minus operating expense it will not be EBITDA because you subtracted the D&A in operating expense. Therefore, you will have to separate out D&A from operating expense and add back the D&A to get EBITDA.

Just keep on looking at examples and you'll get it eventually.

Do what you want not what you can!

What is EBITDA? (Originally Posted: 01/20/2014)

Sounds like a stupid question right?

Well, I actually want to see what is the most technical and impressive one sentence definition for EBITDA.

Key is IMPRESSIVE!

Here is mine:

EBITDA is the measurement of the intrinsic operational performance of the business before leverage.

EBITDA is a made up financial measure by senior bankers to make otherwise poor companies look semiprofitable in order to trick the capital markets into buying into said shitty company's growth story in order to garner fees for their respective bloodsucking ibank.

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

EBITDA means, in relation to a Measurement Period, the aggregate of:
(a) the consolidated operating income (re´sultat d’exploitation) of the Group (including the
results from discontinued operations) adjusted by:
(i) taking no account of gains or losses arising:
(A) on an asset disposal (re´sultat sur cession d’actifs);
(B) in respect of costs of restructuring (couˆt des restructuration);
(C) on the disposal of assets associated with discontinued operations;
(D) in respect of depreciation and amortisation;
(ii) taking no account of any unrealised gains or losses in the fair value of any
ﬁnancial derivative instrument (other than any derivative instrument used to hedge
commodity risk and which is accounted for on a hedge accounting basis) which is
reported through the income statement in accordance with Accounting Standards;
(iii) adding back, if deducted, accounting charges related to share-based payments or
any other employee incentive schemes, entered into as part of equity-based
remuneration of employees of the Group (remuneration en actions), as well as
legal proﬁt sharing (participation);
(iv) taking no account of any charge for impairment charged in the period;
(v) taking no account of the ﬁrst consolidation of any person after the Closing Date or
the exit from the consolidated Group of any person disposed of after the Closing
Date;
(vi) subtracting cash paid as dividends to minority shareholders in consolidated
members of the Group during that Measurement Period; and
(A) amounts paid by the Company to fund payment of monitoring, management
and advisory services and director’s fees, paid to the Company’s direct or
indirect majority shareholders at a time when no Event of Default is
outstanding and provided that the aggregate amount of all such fees does not
exceed c5,000,000 (or its currency equivalent) in any annual Accounting
Period; or
(B) fees for corporate ﬁnance advice provided to the Company by its direct or
indirect majority shareholders in connection with acquisitions, disposals and
other transactions permitted under this Agreement on normal, arm’s-length
terms for such advice plus reasonable out of pocket costs and expenses, in
an amount not exceeding in aggregate c10,000,000 per annum,
(C) amounts paid by the Company to fund the purchase of shares by employees
of the Company or from departing employees of the Company, in each case
under the Company Share Incentive Scheme; or
(D) one-off transaction costs incurred in connection with any acquisition or
disposal; and
(E) agent’s and front-end arrangement and participation fees paid in connection
with the incurrence of any Financial Indebtedness; and
(b) the Group’s share of the proﬁts of associates, joint ventures and minority interests in
which a member of the Group has an interest for that period but limited to the amount
(net of any withholding tax) actually received in cash by way of dividends or distributions
by a member of the Group during that period in respect of that share;
(1) adding the operating income before depreciation, amortisation and impairment charges
of a member of the Group (calculated with the same adjustments as are made in the
deﬁnition of EBITDA) or attributable to a business or assets acquired during the
Measurement Period for that part of the Measurement Period when it was not a member
of the Group and/or the business or assets were not owned by a member of the Group;
(2) deducting any proﬁts or losses attributable to any member of the Group or to any
business or assets sold during that Measurement Period; and
(3) if, in respect of a disposal or acquisition of a business or asset during a Measurement
Period, the Company determines (acting reasonably and on the basis of independently-
provided due diligence) that such transaction will deliver cost savings or synergies,
reﬂecting the impact of such cost savings or synergies as if they had been implemented
on the ﬁrst day of the Measurement Period.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper

Banker HK:

Sounds like a stupid question right?

Well, I actually want to see what is the most technical and impressive one sentence definition for EBITDA.

Key is IMPRESSIVE!

Here is mine:

EBITDA is the measurement of the intrinsic operational performance of the business before leverage.

In banking (and life) the most effective way of explaining something is the simplest, clearest, and most concise way.

Big words and bloated definitions are only welcome in academia (and the Fed) because the whole point is to mask simple concepts in cumbersome semantics.

Not to say your definition of EBITDA meets this criteria; I'm just saying that looking for the most intelligent [em]sounding[/em] way to define something isn't ideal, and can be dangerous (if, as I assume, you're looking to impress during an interview).

Sales - COGS - Depreciation from COGS - SG&A - Depreciation from SG&A - Amortization = EBIT (or Operating Income)

This is usually presented as:

Sales - COGS - SG&A = EBIT (or Operating Income)

The depreciation is "embedded" into COGS and SG&A when presented in traditional, GAAP fashion.

Doing some algebra on the original equation:

Sales - COGS - SG&A = EBIT + Depreciation from COGS + Depreciation from SG&A + Amortization
Sales - COGS - SG&A = EBITDA (in short)

EBITDA question (Originally Posted: 05/15/2015)

Revenue - COGS - operating expense = EBITDA assuming D&A are not included in COGS or operating expense.

Why is it then EBITDA = Net Income + D&A as well?

The first part is before tax whereas the latter is after tax if you start with Net Income

Can somebody help me with this concept?

Thanks

Best Response

CrazyCool:

Assuming a tax rate of 0% and no interest payments, Net income = EBIT and therefore EBITDA = Net Income + D&A

and if you assume no costs EBITDA = revenue

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper

I think this is it. This company works for the government so they don't get taxed, but one of their subsidiary does have income tax.

Assuming a company is tax exempt, that company does not have to add back tax expense from NI + D + A to derive EBITDA right?

And if a company does have to pay tax, the formula for EBITDA should be NI + D + A + Income Tax?

Thanks

inspiring_banker:

Revenue - COGS - operating expense = EBITDA assuming D&A are not included in COGS or operating expense.

Why is it then EBITDA = Net Income + D&A as well?

The first part is before tax whereas the latter is after tax if you start with Net Income

Can somebody help me with this concept?

Thanks

ebitda

Honestly, just start over and forget whatever you read which led you to ask this question. I'm not sure why you're trying to link these random "formulas" together.

Patrick,

I will donate \$10 to WSO if you give this kid (RGTrader) an interview guide. I'm sure others will pitch in as well and we can negate the lost revenue.

"For I am a sinner in the hands of an angry God. Bloody Mary full of vodka, blessed are you among cocktails. Pray for me now and at the hour of my death, which I hope is soon. Amen."

How is it that EBIT incorporates CAPEX, but EBITDA doesn't? (Originally Posted: 11/14/2015)

Is it simply via the depreciation expenses in EBIT? But if there was another CAPEX investment made, it wouldn't directly be counted.. only the depreciation of that asset?

D&A is just capex that gets amortized over time (i.e. you buy a computer for 1,000 with a useful life of 5 years; capex in the current year is 1,000 but D&A for the next 5 years is 200). EBIT includes D&A so over time it captures the capital investments you make. Correct that capex is only captured through D&A of EBIT

Im not exactly sure about your question but I dont think both EBIT and EBITDA incorporates Capex. My understanding is that the multiple EV/EBITDA have to subtract CAPEX for CAPEX intensive industries.

what...

If it's a CAPEX-intensive industry you look at EV/EBIT - that is, you subtract the D&A to "account" for CAPEX.

However, in no way do you subtract CAPEX directly from EBITDA...

Sometimes on a model they'll add D&A back to EBIT to get EBITDA - that's because often times D&A may be included in other expense lines such as cost of goods sold, or SG&A