EBITDA Calculator
Calculate operational profitability by adding back non-cash and financing expenses to Net Income.
Core Financials
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Add-Back Expenses
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Found on Cash Flow Statement.
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By Prof. David Anderson
Investment Banking Veteran | MBA Professor
"In the classroom, we talk about Net Income. But in the Deal Room, we talk about EBITDA. Whether you are selling your business to Private Equity or evaluating a stock, EBITDA is the 'Universal Currency of Valuation.' It strips away the noise of tax laws and financing choices to reveal the raw operating power of a business. However, be warned: not all EBITDA is created equal. Today, we will calculate the number that matters most: Adjusted EBITDA."
EBITDA Calculator & Adjusted EBITDA: Valuation, Margins & QofE Guide
Earnings Before Interest, Taxes, Depreciation, and Amortization
1. The Core Formula: Why We Strip It Down
Why do bankers ignore "Net Income"? Because Net Income is polluted by three things that have nothing to do with operations: Debt Structure (Interest), Government Policy (Taxes), and Accounting History (Depreciation). To compare Company A vs. Company B fairly, we must strip these out.
Method A: The Indirect Method (Bottom-Up)
This is the most common approach, starting from the bottom of the Income Statement.
$$ \text{EBITDA} = \text{Net Income} + I + T + D + A $$
Where I=Interest, T=Taxes, D=Depreciation, A=Amortization
Method B: The Direct Method (Top-Down)
This approach looks purely at operating performance.
$$ \text{EBITDA} = \text{Revenue} - \text{COGS} - \text{OpEx}^* $$
*OpEx excluding D&A
2. Adjusted EBITDA: The "Real" Number
If you are selling a business, Standard EBITDA is usually too low. You need to calculate Adjusted EBITDA by "Adding Back" expenses that a new owner would not incur. This is the battleground of every M&A deal.
💰 Common "Add-Backs" (Seller's Discretionary Earnings)
- Owner's Excess Salary: If you pay yourself $500k but a replacement CEO costs $200k, you add back $300k.
- Personal Expenses: Company cars, country club memberships, personal travel run through the P&L.
- One-time Professional Fees: Lawsuit settlements or M&A consulting fees.
- Rent Normalization: If you own the building and pay yourself above-market rent, add back the difference.
3. The Warren Buffett Warning: The CapEx Trap
Charlie Munger famously called EBITDA "BS Earnings." Why? Because it ignores Capital Expenditures (CapEx).
⚠️ The Trap
Imagine a trucking company with $10M EBITDA. It looks profitable. But, its trucks wear out every 5 years. It MUST spend $8M a year on new trucks just to stay in business.
True Free Cash Flow = EBITDA - CapEx - Change in Working Capital.
In this case, the company only generates $2M, not $10M.
4. "Quality of Earnings" (QofE) Checklist
When big firms like PwC or Deloitte audit a company for sale, they perform a QofE analysis. Use this checklist to audit your own EBITDA quality.
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Sustainability of Revenue: Is the EBITDA driven by recurring customers (SaaS) or one-off "lumpy" projects (Construction)? Recurring is worth a higher multiple.
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Capitalization Policy: Did the company aggressively capitalize expenses (move them to the Balance Sheet) to inflate EBITDA artificially?
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Working Capital Trends: Is EBITDA positive only because they stopped paying vendors (Accounts Payable spikes)? That is a red flag.
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Customer Concentration: Does one client make up >20% of EBITDA? If so, the EBITDA is "Low Quality" and risky.
5. Valuation: The EV/EBITDA Multiple
Once you have your Adjusted EBITDA, you apply a "Multiple" to determine the Enterprise Value (Selling Price).
$$ \text{Enterprise Value} = \text{Adjusted EBITDA} \times \text{Multiple} $$
What multiple should you expect? It depends entirely on the industry and growth rate.
| Industry | Typical Margin | Typical Multiple (EV/EBITDA) |
|---|---|---|
| SaaS / Software | 40% - 60% | 10x - 20x+ |
| Healthcare Services | 15% - 25% | 8x - 12x |
| Manufacturing | 10% - 20% | 5x - 8x |
| Retail / Restaurants | 5% - 15% | 4x - 6x |
6. Case Study: TechCo vs. HeavyMetal Inc.
Comparing Two $10M EBITDA Companies
Both companies have $10 Million in EBITDA. Are they worth the same?
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TechCo (Software): Has $0 CapEx (just laptops) and grows 30% a year.
Valuation: $10M × 15x = $150 Million. -
HeavyMetal Inc (Steel): Needs $7M/year in CapEx to fix blast furnaces. Grows 2% a year.
Valuation: $10M × 5x = $50 Million.
Lesson: EBITDA is the starting line, not the finish line. CapEx and Growth determine the multiple.
7. Professor's FAQ Corner
Q: Is EBITDA the same as Gross Profit?
No. Gross Profit is Revenue minus Direct Costs (COGS). EBITDA is Gross Profit minus Operating Expenses (SG&A, R&D) but before D&A. EBITDA is "lower" down the P&L statement than Gross Profit.
Q: Can a company have negative Net Income but positive EBITDA?
Yes! This is common in startups or highly leveraged companies. They may be operationally profitable (Positive EBITDA), but huge interest payments or depreciation charges drag them into a Net Loss. This is why investors look at EBITDA to see if the core business works.
Q: What is "SDE" vs EBITDA?
SDE (Seller's Discretionary Earnings) is used for small businesses (under $2M revenue). It adds back the entire owner's salary. EBITDA is used for larger companies ($5M+ revenue) and only adds back the excess salary above market rates.
References
- Berkshire Hathaway. "Annual Letter to Shareholders (2000, 2002) - Warren Buffett on EBITDA".
- McKinsey & Company. "Valuation: Measuring and Managing the Value of Companies".
- NYU Stern (Damodaran). "EV/EBITDA Multiples by Industry Sector (Jan 2026 Data)".
- Investopedia. "Quality of Earnings Report".
Find Your True Valuation
Stop guessing. Calculate your Adjusted EBITDA and apply the right multiple.
Calculate Adjusted EBITDA