P&L Foundations
EBITDA
EBITDA means Earnings Before Interest, Tax, Depreciation, and Amortisation. It starts with EBIT and adds back depreciation and amortisation to show operating earnings before non-cash D&A charges.
Concept First
Learn It Step By Step
Start with the business meaning, then move into the formula.
Why add back depreciation and amortisation?
Depreciation applies to tangible assets such as machinery. Amortisation applies to intangible assets such as software or licences. Both are accounting allocations of past spending, so EBITDA adds them back to show operating earnings before these non-cash charges.
Why is EBITDA not the same as cash flow?
EBITDA does not deduct capital expenditure, increases in inventory or receivables, interest payments, tax payments, or loan repayments. A factory can report strong EBITDA and still have weak cash flow if it keeps buying machines or customers pay late.
How should a learner read EBITDA with EBIT?
Compare both. If EBITDA margin is stable but EBIT margin falls, depreciation or amortisation is taking a larger share of sales. That may happen after a company invests heavily in plant, software, or acquired intangibles.
How should I read the answer?
EBITDA helps compare operating earning power before financing, tax, and D&A policy differences. It must be read with capex, working capital, interest, and tax because it is not free cash flow.
Formula Lab
Understand the Formula
Read the formula like a business sentence before calculating it.
Formula
EBITDA = EBIT + Depreciation + Amortisation
Why this formula exists
EBITDA adds back non-cash depreciation and amortisation to operating profit.
How it is derived
Start with EBIT. Add Depreciation and Amortisation because they reduced accounting profit but did not use current-year cash directly.
Simple example
EBIT Rs. 15L + Depreciation Rs. 4L + Amortisation Rs. 1L = EBITDA Rs. 20L.
Solved Case Study
Read the Numbers Like an Analyst
Work through one business case slowly: understand the situation, calculate the ratios, then interpret what the numbers are really saying.
Case context
If EBIT is Rs. 120L, depreciation is Rs. 35L, and amortisation is Rs. 5L, EBITDA is Rs. 160L. On sales of Rs. 800L, EBITDA margin is 20 percent.
Case: Add back non-cash asset charges
A plant reports EBIT of Rs. 130L after charging depreciation of Rs. 36L and software amortisation of Rs. 4L. Net sales are Rs. 850L.
Calculate EBITDA
EBITDA reverses depreciation and amortisation because they are accounting allocations, not current-year cash outflows.
The company generated Rs. 170L before D&A, finance cost, and tax.
Calculate margin and interpret
EBITDA margin shows operating earning power before D&A as a percentage of sales.
The gap shows the asset-charge burden. EBITDA is useful, but it is not free cash flow.
Interpretation
What This Means In Practice
Read the result as a business signal, not as a standalone number.
Read it through the P&L chain
EBITDA helps compare operating earning power before financing, tax, and D&A policy differences. It must be read with capex, working capital, interest, and tax because it is not free cash flow. Ask where this item sits between revenue, gross margin, EBIT, PBT, and PAT. The same rupee amount can mean different things depending on whether it affects product economics, operating overhead, finance cost, or tax.
What a manager should investigate
EBITDA is a useful operating earnings lens, but strong EBITDA is not enough unless cash conversion, capex intensity, interest, and tax are also understood. Check trend as a percentage of net sales, compare with peers, and identify the driver: price, volume, input cost, overhead control, accounting classification, or one-time item.
Key Takeaway
EBITDA is a useful operating earnings lens, but strong EBITDA is not enough unless cash conversion, capex intensity, interest, and tax are also understood.
Practice Checkpoint
Check Your Understanding
Work through the quiz in smaller sets. Your answers stay visible while this page is open, so you can review before moving on.
Question 1 of 20
Level 1What does EBITDA measure?
Question 2 of 20
Level 1Why is EBITDA usually higher than EBIT?
Question 3 of 20
Level 1Which warning about EBITDA is correct?
Question 4 of 20
Level 1Why do valuation analysts often use EBITDA?
Question 5 of 20
Level 1If EBITDA margin is stable but EBIT margin falls, what should be checked?
15 questions remaining in this lesson.
Completion Tracking
Mark this lesson complete
Saved in this browser.
Continue Learning
Revenue from Operations
P&L Foundations
Knowledge Path
Connected Concepts
3 linked lessons