Thus, operating income calculation is EBITDA = Operating Income + Depreciation & Amortization. While the net income calculation is EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization.
Essentially, EBITDA is net income or earnings adding back interest, taxes, depreciation and amortization. So, the analysis would help to compare profitability among companies and industries. Plus, it could eliminate the effects of financing and capital expenditures. The use of EBITDA is in the valuation ratios that could compare enterprise value and revenue.
Furthermore, interest expenses and interest income add back to net income.
It neutralizes the cost of debt as well as the impact on interest payments have on taxes. This is because income taxes also add back to net income. So, it does not always increase EBITDA if the company encounters net loss. Companies tend to spotlight their EBITDA performance when they do not have a positive net income. This is not always about market trickery, but sometimes it could distract inventors from the lack of profitability.
The use of depreciation and amortization accounts in a company is to pay the cost of property, plants, and equipment, and capital investments. Amortization is for the expense of the cost of software developments or other intellectual property. Therefore, early stage technology and research companies tend to use EBITDA while communicating with investors and analysts.
