What Is EBITDA? Meaning, Formula, and How To Calculate

EBITDA is a financial metric that shows how much earnings a company makes before interest, taxes, depreciation, and amortization. 

Business owners and investors use EBITDA to assess performance. The metric can also help estimate a company’s value. However, it leaves out real costs and isn’t recognized under generally accepted accounting principles (GAAP).

Here’s what you need to know about EBITDA, plus how businesses use it alongside standard measures of profitability.

What is EBITDA?

EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortization.” It’s typically used by companies with large capital expenses, such as manufacturers, and by early stage technology companies that are not yet profitable and spending heavily on research and development. 

EBITDA excludes interest and taxes because interest costs depend on how much a company borrows, and taxes can vary depending on a company’s location and tax rates. These exclusions mean EBITDA is higher than net income, or even positive when a company has net losses. 

EBITDA became popular in the 1980s as a way to evaluate buyers who acquired companies using heavy debt financing—a process known as a leveraged buyout—based on their ability to service the debt in the short term. 

What is EBITDA margin?

EBITDA margin shows how your EBITDA compares to total revenue. It helps financial teams and investors determine the cost efficiency of a business.

The formula to calculate EBITDA margin is:

EBITDA margin = EBITDA / Total revenue 

If your EBITDA is $100,000 and your total revenue is $1 million, for example, your EBITDA margin would be 10%.

Research from NYU Stern, as of January 2026, puts the average EBITDA margin for a general retail business at 10.11%. It’s much higher in some industries (like 58.45% for green and renewable energy businesses) and much lower for others (like -2.65% for consumer and office electronics brands). 

Shopify’s profit reports let you source financial data for your own reporting. You can even ask Sidekick for help retrieving certain metrics. For example, you could ask the AI assistant, “What was my total revenue for 2025?” to make a quick EBITDA margin calculation. 

How to calculate EBITDA

The most common way to calculate EBITDA starts with earnings, or net income. From there, expenses for interest, taxes, depreciation, and amortization are added back. 

The bottom-up EBITDA formula is:

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

You can simplify this even further if you know your operating income using the top-down EBITDA formula:

EBITDA = Operating income (EBIT) + Depreciation + Amortization

Here’s what that might look like in practice:

The challenge in determining EBITDA is finding the depreciation and amortization amounts, as well as interest and income taxes. This might require searching in places beyond the main income statement, such as supplements and management notes. Depreciation and amortization often can be found in a company’s cash flow statement, specifically the cash flow from operations.

Shopify’s Finance Summary report offers a starting point. It compiles data across every sales channel to show how much net income you’ve received during the EBITDA reporting period.

EBITDA components

EBITDA contains the following components:

Earnings

Earnings are the bottom line, or net income, on an income statement after all cash and non-cash expenses are subtracted. EBITDA calculations usually start here, although you could also start with operating income or earnings before interest and taxes (EBIT). In that case, only depreciation and amortization are added back.

Interest

Interest expense on debt is listed before taxes because the cost is tax-deductible, lowering a company’s taxable income. 

For example, if Company A and Company B both have operating income of $20 million, but Company A paid $5 million in interest, its taxable income is $15 million. Debt-free Company B’s taxable income is $20 million because it has no interest expense to deduct.

Taxes

A company’s income tax expense is based on its taxable income and its percentage tax rate. Property taxes are included in operating expenses, but aren’t added back when calculating EBITDA—only income taxes are excluded.

Using the above example, assuming both companies are taxed at 20%, Company A pays $3 million in taxes and Company B pays $4 million. For purposes of EBITDA calculations, Company A adds back a combined $8 million from interest and taxes while Company B adds back only $4 million from taxes.

Depreciation

Depreciation is a non-cash expense that represents the estimated decline in productive value of a company’s tangible assets, such as property and equipment. 

Imagine a manufacturer that buys new machinery for $50 million with an estimated useful life of five years. To account for the wear and tear on the assets, the company may record a $10 million non-cash expense in each of the next five years to represent the declining value, even though it paid upfront for the machinery. 

Amortization

Amortization accounts for the estimated reduction in value of intangible assets, such as software development and intellectual property, including patents, trademarks, and copyrights. It’s a non-cash expense.

Unlike depreciation, which can vary based on assumptions about an asset’s useful life and how much to depreciate each year, amortization typically follows a set schedule, such as 15 years in equal annual expense.

Importance of EBITDA

EBITDA can be beneficial to business managers and financial professionals because it helps you compare businesses, assess debt service ratios, and measure operational performance.

It helps you focus on operations

Setting aside the non-operating expenses of interest and taxes, as well as the non-cash items of depreciation and amortization, EBITDA lets you analyze a company on the strength of its core operations and ability to generate cash. EBITDA is sometimes referred to as a normalized measure of performance.

It allows you to make comparisons

Removing non-cash expenses, which can differ dramatically from company to company, lets you compare operational efficiency of similar companies and their ability to generate EBITDA as a share of revenue (a measure that’s similar to profit margins). 

It’s especially useful when comparing two international companies, because EBITDA neutralizes differences in tax jurisdictions.

It’s capital-structure neutral

EBITDA removes any bias about a company’s choice of debt or equity to fund operations, again showing how a company’s underlying operations perform.

It lets you assess debt service ratios

EBITDA can provide a clearer picture of a company’s ability to pay interest on debt, using ratios such as EBITDA-to-interest-expense. 

For example, if a company has annual EBITDA of $20 million and interest expense of $2 million, its debt-service coverage ratio is 20-to-2, or 10. 

The Federal Reserve says leveraged lenders in the US should make sure that the borrower’s total debt divided by EBITDA doesn’t exceed more than six times their planned asset sales.

It’s useful for valuation

EBITDA helps value your business, which you’ll need if you’re looking for investors or selling your business. 

David Gaylord, cofounder of Bushbalm, went onto Dragons’ Den with an EBITDA-based valuation. 

“Typically if you have about 20% EBITDA, that’s really strong and people will look at that really favorably,” David says in a Shopify Masters interview. 

A common measure is enterprise-value-to-EBITDA (EV/EBITDA). This measures a company’s total market value of its shares, plus its debt, alongside EBITDA. So, for example, if a company has an EBITDA of $20 million and similar companies have been sold at prices representing 10 times EBITDA, the company might be valued with an EBITDA multiple at about $200 million.

NYU Stern research, as of January 2026, compiled the average EV/EBITDA by sector for others to benchmark theirs against. For example: 

• Apparel: 10.3
• Consumer and office electronics: 30.7
• Home furnishings: 11.27
• General retail: 17.38
• Entertainment: 19.41

EBITDA vs. EBITA vs. EBIDA

These three financial metrics help businesses show earnings, but what they include and exclude differ:

Limitations of EBITDA

EBITDA may not always be the best way to assess a company’s financial performance. Among EBITDA’s limitations:

It ignores interest and taxes

Interest and taxes are real cash costs that represent money going out the door, which reduce a company’s profit.

It neglects asset deterioration

EBITDA pretends that assets don’t decline in value. Leading investor Warren Buffett, chairman of Berkshire Hathaway, has previously stated depreciation and amortization represent real costs and labeled EBITDA as “a flawed favorite of Wall Street.”

EBITDA also doesn’t account for capital expenditures (CapEx) necessary to repair or replace worn-out assets. For example, if a manufacturer reports $2 million in EBITDA for the year but spent $500,000 to replace end-of-life machinery, its cash flow is closer to $1.5 million. 

It overstates profitability

EBITDA can make a company look more profitable than it really is; in many cases, companies with positive EBITDA report losses on financial statements. This happens because EBITDA is greater than net income by excluding various expenses.

It’s not GAAP-approved

EBITDA is an improvised measure, not approved under generally accepted accounting principles (GAAP). 

Companies may present EBITDA to investors in conjunction with net income, but not as a substitute.