EBITDA calculator: what does the trading itself earn?

The EBITDA formula

• EBITDA = net profit + interest + tax + depreciation + amortisation. Start from the bottom line of the Profit and Loss and add back the four costs.
• EBITDA = operating profit + depreciation + amortisation. Quicker when the report already shows operating profit (EBIT), which is before interest and tax. The operating profit guide shows how to get it.
• EBITDA margin = EBITDA ÷ sales. It lets you compare years when sales have changed.
• Adjusted EBITDA = EBITDA + one-off costs. Used when a business is sold or refinanced, to show the profit that repeats.

Interest, tax, depreciation and amortisation are taken out because they depend on how the business is funded, where it pays tax and how its accountant writes off assets, not on how well it trades. That makes EBITDA useful for comparing businesses and for valuing one. It also makes it flattering.

EBITDA calculation: a worked example

A joinery workshop in the UK, one year. Made-up figures to show the arithmetic.

	£
Sales	850,000
Net profit after tax	54,000
Add back corporation tax	18,000
Add back interest on the machinery loan	9,000
Operating profit (EBIT)	81,000
Add back depreciation on machines and vans	32,000
EBITDA	113,000
Add back a one-off legal bill over the lease	12,000
Adjusted EBITDA	125,000

Check: the tax is 25% of the 72,000 profit before tax (54,000 + 18,000), the UK main rate. 72,000 + 9,000 = 81,000 of operating profit, and 81,000 + 32,000 = 113,000 of EBITDA, which is 13.3% of sales. Adjusted EBITDA is 14.7%.

What it says to the owner:

• The borrowing is comfortable. EBITDA covers the 9,000 of interest about 12.6 times. A lender asking about a new loan will also count the capital repaid each year and the tax and drawings paid out; the DSCR calculator shows whether the cash covers all the repayments and how much more the business could borrow.
• The equipment is a real cost. Depreciation is 28% of EBITDA. The saws and vans wear out and have to be replaced with cash, so 81,000 of operating profit is a fairer picture of what the workshop earns than 113,000.
• The add-back has to be believable. If the workshop is sold, a buyer may value it on a multiple of the 125,000, but only if the lease dispute really is settled. A legal bill that comes every year is a cost, not an add-back.
• None of these is the cash. If the workshop bought a 40,000 CNC machine that year and its customers took longer to pay, the bank could still have fallen. The free cash flow calculator starts from the same profit and shows the cash.

Press "Load the worked example" above to see it in the calculator.

EBITDA vs operating profit vs net profit vs cash

• EBITDA: what the trading earns before borrowing, tax and equipment. Buyers and lenders start here.
• Operating profit (EBIT): after the cost of wearing out the equipment. The best single measure of whether the work pays.
• Net profit: after interest and tax, what is left for the owners. Gross profit vs net profit explains the levels above it.
• Cash: what actually reached the bank. Cash flow from operations shows how profit turns into cash, and why it often does not.
• Free cash flow: the cash left after tax, equipment and working capital, either before the lender is paid (unlevered) or after (levered). In the unlevered vs levered free cash flow guide, a joinery company with EBITDA of $140,000 turns out $65,000 unlevered and only $14,500 once interest and loan repayments are paid.

For every level from sales down to retained profit worked through one business, with the formula for each and where it sits in Xero, see types of profit.

Finding the figures in Xero

1. Go to Accounting › Reports › Profit and Loss for the period. Net profit is the last line. How to read a profit and loss in Xero goes through each section.
2. Interest, depreciation and amortisation are expense lines, usually named that way in the standard chart of accounts. Interest on vehicle finance is sometimes coded to motor expenses; move it out for an accurate figure.
3. Tax: a company's corporation tax only appears once the accountant posts the year-end tax journal, so mid-year your Xero net profit is usually already before tax. Enter 0. A sole trader's income tax is personal and never in the business Profit and Loss.
4. Depreciation is often posted only at year end too. A monthly Profit and Loss without it shows operating profit close to EBITDA, which overstates how well an equipment-heavy business is doing.

When EBITDA matters to a small business

• Selling the business. Small businesses are often priced as a multiple of adjusted EBITDA, so each add-back you can evidence adds to the price. If the buyer will run it themselves, they usually start from seller's discretionary earnings, which adds the owner's own pay back too. To check a multiple against the cash the business will make, see discounted cash flow for a small business.
• Borrowing. Lenders compare EBITDA with the interest and repayments on the loan: cash flow cover works the ratio through for a new truck loan, and shows why interest cover alone can look fine when the repayments are not. Many lenders then take tax, equipment and working capital off EBITDA to get CFADS (cash flow available for debt service): in that guide a brewery's EBITDA of £210,000 becomes £140,000 of CFADS, and whether dividends come off first changes how much more it can borrow from about £180,800 to £49,300. Before a big purchase, check the cash runway as well.
• Running it week to week, EBITDA matters less than the margin and the cash. Why did my profit drop covers finding where profit went.

Questions