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How EBITDA is calculated

EBITDA is EBIT plus depreciation and amortisation. On $100,000,000 of EBIT and $20,000,000 of D&A, EBITDA is $120,000,000. Unlevered free cash flow on that same sheet is $55,000,000, because tax, capex and working capital still come out.

Unlevered free cash flow

$55,000,000

NOPAT is $75,000,000.

EBIT
$100,000,000
Tax
$25,000,000
NOPAT
$75,000,000
D&A
$20,000,000
Capex
$30,000,000
Change in NWC
$10,000,000
Free cash flow
$55,000,000
$

Figures on this page are in millions of dollars.

%
$
$
$

A rise uses cash. A fall (negative here) is a source of cash.

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EV/EBITDA

In short

  • EBITDA is EBIT plus D&A. On this sheet that is $100,000,000 plus $20,000,000, which is $120,000,000.
  • Tax at 25 percent on that EBIT is $25,000,000. NOPAT is $75,000,000. EBITDA never took the tax off.
  • Capex $30,000,000 and a $10,000,000 working-capital increase then take free cash flow to $55,000,000.
  • A working-capital release takes FCF to $70,000,000. EBITDA stays $120,000,000. Capex of $50,000,000 takes FCF to $35,000,000. EBITDA still does not move.
  • How free cash flow works is the bridge. This page is the D&A add-back.

Add D&A back to operating profit

EBITDA is EBIT plus depreciation and amortisation:

EBITDA=EBIT+D&A\text{EBITDA} = \text{EBIT} + \text{D\&A}

On $100,000,000 of EBIT and $20,000,000 of D&A, EBITDA is $120,000,000. That add-back is the entire difference from EBIT.

D&A was deducted on the way to EBIT and did not spend cash this period, so adding it back is a step toward cash. Stopping there is not cash. Tax, capex and working capital still sit below.

The free cash flow calculator on this page prints EBITDA on the way to unlevered free cash flow. EBIT against EBITDA is the add-back on its own.

Tax, capex and working capital are why \$120,000,000 is not \$55,000,000

Tax at 25 percent of $100,000,000 is $25,000,000. NOPAT is $75,000,000. Add D&A, subtract $30,000,000 of capex, subtract a $10,000,000 working-capital increase: $55,000,000 of unlevered free cash flow.

EBITDA skipped every one of those lines. Calling $120,000,000 cash overstates what the operations can distribute by the gap down to $55,000,000.

Working capital can move FCF and leave EBITDA still

Hold EBIT, tax, D&A and capex. Let working capital fall rather than rise. FCF becomes $70,000,000. EBITDA is still $120,000,000. The working-capital line is not in it.

A year of stock rundown or faster collections is a one-time source. EBITDA will not warn you that it cannot repeat.

Capex can move FCF and leave EBITDA still

Back to the first sheet's NOPAT, D&A and working-capital increase, with capex now $50,000,000. FCF falls to $35,000,000. EBITDA is still $120,000,000. Deferred capex can make FCF look strong. It cannot make EBITDA look different, because capex is not in EBITDA.

EBITDA against free cash flow is that gap. EV/EBITDA is why the add-back still gets used as a multiple's denominator: it is before capital structure and before capex, which is a feature of the multiple and a defect of the cash reading.

What the add-back is silent on

It does not know whether this year's D&A matches this year's maintenance capex. A firm whose assets last thirty years and a firm that replaces them every five can print the same EBITDA and a very different cash need.

It is also not EBIT. EBIT already deducted D&A. Adding it back is a choice, not a correction of a mistake in EBIT.

What this page is not doing

It is not a cash figure, not levered FCF, and not an EV/EBITDA engine. The three sheets are EBITDA $120,000,000 with FCF $55,000,000, the same EBITDA with FCF $70,000,000 after a working-capital release, and the same EBITDA with FCF $35,000,000 after heavier capex. This is educational material, not financial advice.

Worked examples

The five-line teaching sheet

EBIT $100,000,000, tax 25 percent, D&A $20,000,000, capex $30,000,000, working capital up $10,000,000. What is EBITDA, and what is FCF?

  1. Tax: $25,000,000. NOPAT: $75,000,000.
  2. EBITDA is EBIT plus D&A: $120,000,000.
  3. FCF: $55,000,000.

EBIT is $100,000,000. EBITDA is $120,000,000. NOPAT is $75,000,000. Unlevered free cash flow is $55,000,000.

Working capital as a source

Keep EBIT, tax, D&A and capex. Working capital falls, delta -5000000. What is EBITDA?

  1. EBIT is still $100,000,000. Tax is still $25,000,000. NOPAT is still $75,000,000. EBITDA is still $120,000,000.
  2. FCF becomes $70,000,000.

EBITDA is still $120,000,000. Free cash flow is $70,000,000. The working-capital release moved FCF, not EBITDA.

Heavier capex

First sheet, but capex is $50,000,000. What is EBITDA?

  1. EBIT is still $100,000,000. Tax is still $25,000,000. NOPAT is still $75,000,000. EBITDA is still $120,000,000, because capex is not in it.
  2. FCF falls to $35,000,000.

EBITDA is still $120,000,000. Free cash flow is $35,000,000.

Common questions

Is EBITDA cash?

No. It adds D&A back and then stops. Tax, capex and working capital still have to come out. On the teaching sheet that gap is $120,000,000 against $55,000,000.

Why do people still use it?

As a denominator for EV/EBITDA, which is before capital structure and before capex. That is a multiple, not a cash reading.

EBIT or EBITDA for coverage?

Interest coverage is EBIT over interest. EBITDA coverage is a different, looser test. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.