How to Calculate EBITDA (14:11)
A walk-through on how to calculate EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) for Steel Dynamics.
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EBITDA is important NOT because it is a good “proxy for cash flow” – as is commonly claimed by financiers and some academic sources – but rather because it lets you more easily compare different companies’ valuations, especially companies with different capital structures, tax rates, and depreciation policies.
To calculate it, you start with Operating Income (EBIT) on the Income Statement, and then add back Depreciation & Amortization (D&A) on the Cash Flow Statement, and then any other one-time or non-recurring charges you find on the financial statements or in the Notes to the Financial Statements.
To qualify as an add-back, an item MUST:
1. Actually be non-recurring. A Restructuring Charge that has recurred every year over the past 10 years is NOT “non-recurring” even if the company claims it’s just temporary.
2. Impact Operating Income. You would never add back something like Deferred Income Taxes because they’re “below the line” and only impact the company’s Income Taxes, not its Operating Income.
Sometimes, items could go either way; for example, some banks and groups add back Stock-Based Compensation while others do not. We keep things as simple as possible and ONLY add back charges that are truly non-recurring and ones that actually impact Operating Income in this example.
You’ll learn how to tell whether or not an item meets those criteria above, even when it’s a tricky case such as deciding if Gains / (Losses) truly affect the Operating Income line.