The formula
EBIT = net income + interest expense + income tax expense. EBITDA = EBIT + depreciation + amortization. Adjusted EBITDA = EBITDA + the adjustments you list. The SEC staff uses the same construction: "earnings" in EBIT and EBITDA means GAAP net income.
Source
SEC Division of Corporation Finance, Non-GAAP Financial Measures, Compliance and Disclosure Interpretations, questions 103.01 and 103.02, together with Regulation G and Item 10(e) of Regulation S-K.
When to use it
Use it to prepare a reconciliation for a draft earnings release or a lender package, to recompute a client's EBITDA from the audited statements, or to check that a covenant or valuation input ties to the income statement.
Limits
EBITDA ignores capital expenditure, working capital, and the cash cost of debt, and it can look healthy in a business that is burning cash. Whether interest means gross interest expense or interest net of income, and whether impairment or stock compensation are added back, varies by user. Credit agreements have their own definitions. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the EBITDA formula?
EBITDA = net income + interest + income taxes + depreciation + amortization. Equivalently, EBIT plus depreciation and amortization, where EBIT is net income plus interest and taxes.
Is EBITDA a GAAP measure?
No. It is a non-GAAP financial measure. For companies that file with the SEC, Regulation G and Item 10(e) of Regulation S-K apply when it is presented in public filings and earnings releases.
What does the SEC staff say about reconciling EBITDA?
In its Non-GAAP Compliance and Disclosure Interpretations, question 103.02, the staff says that when EBIT or EBITDA is presented as a performance measure, it should be reconciled to net income as presented in the statement of operations, not to operating income. Question 103.01 says that a measure calculated differently from the EBIT and EBITDA definitions should not carry those labels, and should be titled something like Adjusted EBITDA. Question 103.02 also says the measures must not be presented on a per-share basis.
What is the difference between EBITDA and Adjusted EBITDA?
Adjusted EBITDA starts from EBITDA and adds back or deducts items management considers unusual or non-cash, such as stock compensation, restructuring or a litigation settlement. There is no standard list, so each adjustment needs a description and consistent treatment across periods.
Do lenders define EBITDA the same way?
Not usually. Credit agreements define Consolidated EBITDA in their own terms, often with caps on add-backs and pro forma adjustments. A covenant calculation follows the agreement, not this page.
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