What Is EBITDA? Formula, Margin, and Examples

Powerdrill Bloom·September 24, 2026

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. You calculate it by adding those four items back to net income. The result shows profit from operations before financing costs, tax, and non-cash charges. EBITDA margin divides that figure by revenue.

This guide covers the official definition, both ways to calculate it, and how to work out the margin. It includes a worked example and a comparison with related profit measures. It also covers the SEC's rules on "Adjusted EBITDA" and the limits worth knowing before you rely on it.

What EBITDA means

The clearest definition comes from the U.S. Securities and Exchange Commission. Its staff guidance on non-GAAP financial measures cites an Exchange Act release. That release describes the measure as "earnings before interest, taxes, depreciation and amortization."

The same guidance answers an obvious question: which earnings? The SEC's answer is precise. "'Earnings' means net income as presented in the statement of operations under GAAP."

So the measure starts from the bottom line of the income statement and works back up. Each of the four add-backs removes a cost that says less about day-to-day operations:

Interest reflects how the business is financed, with debt or equity.
Taxes depend on jurisdiction and tax planning.
Depreciation spreads the cost of physical assets, such as equipment, over their useful life.
Amortization does the same for intangible assets, such as software or acquired customer lists.

Removing them makes it easier to compare the operating performance of two businesses with different debt levels, tax situations, or asset ages.

The figure is a non-GAAP measure. It is not defined by accounting standards, so it does not appear as a required line on audited financial statements. Companies that report it publicly must follow the SEC's rules on how they present it, covered later in this guide.

The EBITDA formula

There are two common ways to calculate it. Both should reach the same number when the income statement has no unusual items between operating income and net income.

From net income

This is the route the SEC definition points to:

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

Start with net income from the income statement. Add back interest expense and income tax expense. Then add depreciation and amortization. If the income statement does not show them separately, look in the cash flow statement or the notes.

From operating income

Many analysts take a shortcut:

EBITDA = Operating income + Depreciation + Amortization

Operating income, sometimes called EBIT, already excludes interest and taxes. Adding back depreciation and amortization gives the same result in simple cases.

The SEC's guidance explains why the two routes can differ. When a company presents EBIT or EBITDA as a performance measure, it "should be reconciled to net income." The guidance adds that operating income is not the most directly comparable measure. The reason given is "because EBIT and EBITDA make adjustments for items that are not included in operating income." Gains, losses, and other income below the operating line are examples.

In practice, use the net income route when you need a figure you can defend. Use the operating income route for a quick estimate.

EBITDA margin

The margin turns the figure into a percentage of revenue, which makes businesses of different sizes comparable.

EBITDA margin = EBITDA ÷ Revenue × 100

A company with $10 million in revenue and $2 million in EBITDA has a 20% margin. A company with $100 million in revenue and $15 million in EBITDA has a 15% margin. The larger company earns more in total, but the smaller one keeps more of each dollar before financing, tax, and depreciation.

Margins differ by industry because cost structures differ. A business that runs heavy equipment carries more depreciation than one that mostly pays salaries, which changes how far EBITDA sits above net income. Compare a company with its own history and with close peers, not with businesses in a different sector.

A worked example

Here is an illustrative income statement for a small company. All figures are made up.

Line	Amount
Revenue	$2,000,000
Cost of goods sold	$1,100,000
Gross profit	$900,000
Operating expenses, excluding depreciation and amortization	$450,000
Depreciation and amortization	$150,000
Operating income	$300,000
Interest expense	$60,000
Income before tax	$240,000
Income tax	$60,000
Net income	$180,000

From net income: $180,000 + $60,000 interest + $60,000 tax + $150,000 depreciation and amortization = $450,000.

From operating income: $300,000 + $150,000 = $450,000.

Both routes agree, because this company has no other income or expenses between operating income and net income.

Margin: $450,000 ÷ $2,000,000 = 22.5%.

Compare that with the other margins from the same statement. The operating margin is 15%, and the net margin is 9%. The gap between 22.5% and 9% is the combined weight of depreciation, interest, and tax. That gap is exactly what a reader needs to understand before treating the higher figure as the company's profit.

Where to find each number

All five inputs sit in a standard set of financial statements, though not always on the same page.

Net income is the last line of the income statement, sometimes called the statement of operations.

Interest expense usually appears as its own line below operating income. Some companies show interest income and interest expense net, so check the notes if you need the gross amount.

Income tax expense appears just above net income. Use the expense recorded in the period, not the cash taxes paid, which appear in the cash flow statement.

Depreciation and amortization are often folded into cost of goods sold and operating expenses on the income statement. The cash flow statement usually lists them as the first adjustments to net income, which makes them easier to find.

Revenue, for the margin, is the first line of the income statement.

For monthly management accounts, the same rules apply. Make sure every month treats each line the same way, or the trend will reflect changes in bookkeeping rather than changes in the business.

What EBITDA is used for

The measure shows up in three common settings.

Comparing operating performance. Because it removes financing and tax effects, it lets you compare companies with different capital structures. Two retailers with the same store performance can report very different net income if one carries heavy debt.

Lending and covenants. Lenders often write covenants around it. The SEC's own guidance discusses a company whose credit agreement "contains a material covenant regarding the non-GAAP financial measure 'Adjusted EBITDA.'" A covenant might cap total debt at a multiple of the measure.

Valuation. Buyers and investors often compare enterprise value with EBITDA. A company's value divided by this figure gives a multiple that can be compared with similar companies or recent deals.

In each case, the measure is a starting point. The detail in the income statement and cash flow statement still matters.

EBITDA vs related measures

Each profit measure answers a slightly different question.

Measure	What it starts from	What it removes	Best for
Net income	Revenue	Nothing; all costs deducted	The bottom-line result under GAAP
Operating income (EBIT)	Revenue	Interest and taxes	Profit from the core business, after depreciation
EBITDA	Net income	Interest, taxes, depreciation, amortization	Comparing operations across capital structures
Adjusted EBITDA	EBITDA	Items management chooses to exclude	Company-specific views, which need careful reading
Operating cash flow	Net income	Non-cash items and working capital changes	How much cash operations actually produced

The last row matters most. The measure is not cash flow. It ignores changes in working capital, such as customers paying late, and it ignores the cash spent on new equipment.

Adjusted EBITDA and the SEC's rules

Many companies report "Adjusted EBITDA," which removes further items such as one-time charges. The SEC's guidance sets clear boundaries on naming and presentation.

Different calculations need a different name. The SEC says measures "calculated differently than those described as EBIT and EBITDA" should not be called EBITDA. Their titles should be distinguished, "such as 'Adjusted EBITDA.'"

Reconcile to net income. As noted above, a company that presents EBITDA as a performance measure should reconcile it to net income, not operating income.

No per-share figures. The guidance says these measures "must not be presented on a per share basis."

Some adjustments can mislead. Separately, the SEC gives an example of a measure that could be misleading. It is one that excludes "normal, recurring, cash operating expenses necessary to operate a registrant's business."

For readers, the practical lesson is simple. When a company reports Adjusted EBITDA, find the reconciliation table and read every adjustment. If a cost recurs every year, ask why it is being removed.

A reconciliation table is easier to read with a short checklist:

Start at net income. The table should begin with the GAAP figure and add items back one line at a time.
Separate the standard add-backs. Interest, taxes, depreciation, and amortization come first. Everything after them is a company choice.
Look for repeats. Compare the adjustments with last year's table. A "one-time" charge that appears every year is a normal cost.
Check the size. If adjustments add up to a large share of the final figure, treat the adjusted number with caution.
Compare with cash. Set the adjusted figure beside operating cash flow. A wide and growing gap deserves a question.

Limits worth knowing

The measure is useful, but it leaves out real costs. Four limits are worth knowing.

It ignores capital spending. Depreciation is added back, but the equipment it represents still had to be bought and will need replacing. A business that must reinvest heavily can show strong EBITDA and weak cash.

It ignores interest. A highly indebted company still has to pay its lenders. Strong EBITDA does not mean the business can service its debt.

It ignores working capital. Growing sales on long payment terms can raise EBITDA while cash falls.

It invites flattering adjustments. Adjusted versions can exclude costs that are part of normal operations, which is exactly the concern the SEC's guidance raises.

Used alongside net income and operating cash flow, it gives a fuller picture. Used alone, it can overstate how healthy a business is.

How to calculate EBITDA from your own statements

For your own company, the calculation is a few lines of arithmetic, but the inputs take time to gather. Interest and depreciation often sit in different places, and monthly statements need the same treatment every month.

An AI workspace can pull the lines together and show the working. Upload your profit and loss statement to Powerdrill Bloom and ask for EBITDA and EBITDA margin by month, calculated from net income. Ask it to show each add-back as a separate row, so you can trace every figure to the source line.

Its AI financial analysis tool page describes running analysis on "your P&L, balance sheet and cash flow" with profitability ratios and multi-period trend lines. If you are building a valuation, the valuation model generator page covers trading comps with margin and multiple columns. For a related margin view, see this guide to the gross margin report.

When you want the add-backs laid out month by month, you can try Powerdrill Bloom with one year of P&L data.

Frequently asked questions

What does EBITDA stand for?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The SEC's guidance adds that "earnings" means net income as presented under GAAP. The measure adds those four items back to net income to show operating profit before financing, tax, and non-cash charges.

How do you calculate EBITDA?

Start with net income and add back interest, taxes, depreciation, and amortization. A shortcut is operating income plus depreciation and amortization. The two routes match unless the company has other income or expenses between operating income and net income.

What is a good EBITDA margin?

It depends on the industry, because cost structures differ from sector to sector. The most useful comparison is with a company's own past margins and with close peers in the same sector. A margin that is rising over time is usually more informative than a single year's figure.

Is EBITDA the same as cash flow?

No. EBITDA ignores changes in working capital, such as slow-paying customers, and the cash spent on new equipment. Operating cash flow accounts for working capital changes, so it shows how much cash operations actually produced.

What is the difference between EBITDA and Adjusted EBITDA?

EBITDA follows the standard definition: net income plus interest, taxes, depreciation, and amortization. Adjusted EBITDA removes further items chosen by management. The SEC says any measure calculated differently must be named differently, "such as 'Adjusted EBITDA.'"

Sources: U.S. SEC, Non-GAAP Financial Measures, Compliance and Disclosure Interpretations. Guidance read on September 24, 2026.