What is EBITDA? Definition, Formula, and Example
EBITDA is earnings before interest, taxes, depreciation, and amortization — a proxy for a company's core operating cash-generating power stripped of financing, tax, and accounting decisions.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips a company's net income back to a measure of core operating profitability by adding back the four items most affected by financing structure, jurisdiction, and accounting policy rather than actual business performance: interest expense (a function of how much debt a company carries), taxes (a function of jurisdiction and tax strategy), and depreciation and amortization (non-cash accounting charges for spreading the cost of assets over time). The result is meant to approximate the cash-generating power of operations alone, which is why it's the default metric for comparing companies with different capital structures, tax situations, or capital intensity — and why it's the anchor multiple (EV/EBITDA) in private equity and M&A valuation.
How It's Calculated
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Or, built up from the income statement instead of down from net income:
EBITDA = Operating income (EBIT) + Depreciation + Amortization
Both arrive at the same number since operating income already excludes interest and taxes. Depreciation and amortization figures are pulled from the cash flow statement, since they're often not broken out separately on the income statement.
Worked Example
Microsoft reported fiscal year 2025 revenue of $281.7 billion and operating income of $128.53 billion. Adding back roughly $31.4 billion in depreciation and amortization brings EBITDA to $159.9 billion, up 21.9% year-over-year — a figure that implies an EBITDA margin of 56.8% ($159.9B / $281.7B), among the highest of any large-cap company, reflecting the software business's low incremental capital intensity relative to its revenue base. Compare that to net income of $101.83 billion: the roughly $58 billion gap between EBITDA and net income is made up of D&A, interest, and taxes — the exact items EBITDA is designed to exclude so that Microsoft's operating performance can be compared against a capital-intensive peer without those distortions.
When Traders Use It
EBITDA's primary use is as the numerator or denominator in EV/EBITDA (enterprise value divided by EBITDA), the standard multiple for comparing companies across a sector regardless of debt load — because EV already adds back net debt, and EBITDA already strips out the interest expense that debt generates, the ratio neutralizes leverage differences that would distort a straight P/E comparison. It's especially load-bearing in capital-intensive sectors (telecom, cable, industrials, real estate) where D&A is large and volatile, and in leveraged buyout and M&A analysis, where EBITDA is the standard base for setting purchase multiples and debt covenants ("Debt/EBITDA" leverage ratios). Traders screening for margin expansion also track EBITDA margin trends quarter over quarter as an operating-efficiency signal independent of financing decisions.
Limitations and Common Misconceptions
EBITDA is not cash flow, despite frequently being described that way — it ignores capital expenditures entirely, so a capital-intensive business can show strong EBITDA while spending nearly all of it (or more) on equipment just to maintain operations, leaving little or no actual free cash. Charlie Munger's line — "every time you hear EBITDA, substitute the words 'bullshit earnings'" — reflects the real critique: by adding back D&A, EBITDA implicitly treats depreciating assets as if they never need replacing, which is false for factories, fiber networks, or fleets of equipment. It also ignores working capital changes and, being a non-GAAP metric, has no standardized definition — companies routinely publish "adjusted EBITDA" that strips out additional items like stock-based compensation or restructuring charges, inflating the figure well above a strict by-the-book calculation. Always check what's been added back before comparing adjusted EBITDA across companies.