| Type | Profitability Metric |
| Formula | Net Income + Interest + Taxes + D&A |
| Alternatively | Operating Income (EBIT) + D&A |
| Best Used For | Company-to-company operational comparisons |
formulaEBITDA = Net Income + Taxes + Interest Expense + D&AThe calculation starts at the bottom of the Income Statement (Net Income) and works backward. You add back the Taxes (which exist outside management's operational control), Interest (which isolates the capital structure), and Depreciation/Amortization (non-cash accounting charges for capital expenses).
| Metric | Company A | Company B |
|---|---|---|
| Net Income | $10M | $10M |
| Depreciation | $2M | $15M |
| Interest | $1M | $5M |
| EBITDA | $13M | $30M |
Despite showing the exact same Net Income, Company B is generating significantly more core operating cash. Their Net Income was artificially reduced by high depreciation charges (because they bought machinery earlier) and high interest (due to debt).
Private equity firms universally use EBITDA to value acquisitions (typically targeting 6x to 12x EV/EBITDA). Because they plan to change the company's debt structure and tax strategies after buying it, they only care about the purest operational cash engine.
The numerator to EBITDA. EV/EBITDA is the gold standard valuation multiple for M&A.
Operating margin relies on EBIT. Adding D&A morphs this into the EBITDA margin.