To calculate EBIT manually, subtract your expenses (besides interest and taxes) from your sales revenue. For example, let’s say we own a construction company whose revenue for the past year was $68,000,000. However, our operating expenses were $45,000,000. In this case, our company’s operating profit (EBIT) = revenue - expenses = $68,000,000 - $45,000,000 = $23,000,000. Expenses include: depreciation, amortization, salaries, rent & utilities, cost of goods sold, selling, general and administrative expenses.
Assets that a company owns can decrease in value over time through natural wear and tear and through fluctuating market conditions. Expenses incurred in this way are known as expenses due to depreciation. Usually, depreciation expenses are listed on a company’s profit and loss report or on its cash flow statement. Find and add up any itemized depreciation expenses to obtain a single total for your company’s depreciation expenses. Record this value - it will be needed to calculate EBITDA. For example, let’s say our construction company purchased several buildings a few years ago and that their combined value was $8,750,000. These buildings have an estimated useful life of 35 years. In this case, assuming linear or straight-line depreciation, the cranes will collectively depreciate $8,750,000/35 = $250,000 per year.
For example, let’s say that a few years ago, our company spent $100,000 to obtain certain industry trademarks. Let’s say that this amount of money bought us the rights for five years. In this case, the expense due to amortization would be $100,000/5 = $20,000 per year.
In our construction company example, let’s assume that the depreciation and amortization expenses calculated above are the only ones our company incurred (in real life, obviously, we may have to add multiple depreciation and/or amortization expenses to obtain a total value). In this case, we could calculate via the formula EBIT + depreciation + amortization = EBITDA. $23,000,000 + $250,000 + $20,000 =$23,270,000. Our company’s EBITDA is $23,270,000.
EBITDA isn’t necessarily a good indication of whether your company is losing money or making money. It’s possible, for instance, for a company to have a positive EBITDA but a negative operating cash flow. Because of this, EBITDA can make a company look much healthier than it actually is.
As a real-world example of EBITDA manipulation, some airline companies have altered the depreciation schedules on their aircraft to make their EBITDA appear larger. [4] X Research source
