Finally, let's learn about EBITDA and how to calculate it!

Remember: Operating Income is also called EBIT, or Earnings before Interest and Taxes, because it accounts for all types of expenses other than interest and taxes 💡

By adding Depreciation and Amortization expenses to EBIT, we get EBITDA which stands for Earnings before Interest, Taxes, Depreciation, and Amortization 📊

Depreciation and Amortization are subtracted from Revenue when calculating Operating Income, so you’ll need to add it back to get “back” from Operating Income to EBITDA 🔙

But why would investors go through the trouble of adding Depreciation and Amortization?

Well, it’s because D&A are non-cash expenses, meaning no cash is necessarily spent when the expense is recorded, so it kind of artificially changes the value of operating income 💼

If you recall, our T-Shirt company paid $500 in cash for a sewing machine.

But on the income statement, they used depreciation to spread that cost out as $50 / year over 10 years ⏳

So if you're looking at the income statement 5 years after it bought the machine, you'd see a $50 expense even though it didn't technically spend any cash on the machine that year 💵

As a result of D&A not being cash expenses, removing it from EBIT to get EBITDA can give investors a more accurate picture of how profitable a company’s operations actually are 📈

So now you know that EBITDA is just Operating Income with Depreciation and Amortization added to it 🧮

Next, let’s compare some different profit metrics and how they’re used 📝

Test your knowledge

What does EBIT stand for?

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What is added to EBIT to get EBITDA?

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Why do investors choose to evaluate profits without including D&A?

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What is true about Depreciation?

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How might EBITDA provide a more accurate profitability picture?

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What's next?

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