Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) indicates a company’s operating performance, by evaluating performance without factoring in financing, investing or taxation details. EBITDA is calculated by adding back non-cash expenses of depreciation and amortization to the operating income. It can also be calculated by adding back interest, taxes, depreciation and amortization to the company’s profit after tax (PAT).

EBITDA: Operating Profit + Depreciation + Amortization

Or

EBITDA = Profit after tax (PAT) + Interest + Tax + Depreciation + Amortization

EBITDA helps us 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. Such analysis is important when comparing companies across a single industry but different tax brackets or single industry but different funding structure (e.g. more debt and less equity will lead to lower net profit due to large interest expense).

In order to have a better use of EBITDA, analysts use EBITDA Margin, which measures a company’s EBITDA as a percentage of its total revenue.

         EBITDA Margin = EBITDA / Total Revenue *100 

To understand in more detail let us take a look at the FY2018 Profit & Loss Statements of ABC Limited: