There are a number of metrics available to measure profitability. EBITDA (earnings before interest, taxes, depreciation, and amortization) is one indicator of a company's financial performance and is used to determine the earning potential of a company. With EBITDA, factors like debt financing as well as depreciation, and amortization expenses are stripped out when calculating profitability.

## Ways to Calculate EBITDA

There are two formulas for calculating EBITDA. The first formula uses operating income as the starting point, while the second formula uses net income. Both formulas have their benefits and drawbacks. The first formula is below:

﻿\begin{aligned} &\text{EBITDA}=\text{operating income} + \text{depreciation and amortization} \end{aligned}﻿

Operating income is a company's profit after subtracting operating expenses or the costs of running the daily business. Operating income helps investors separate out the earnings for the company's operating performance by excluding interest and taxes.

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#### EBITDA

EBITDA Example

Below is the income statement for JC Penney Company Inc. (JCP) as of May 5, 2018.

• Operating income was $3 million, highlighted in blue. • Depreciation was$141 million, but the $3 million in operating income includes subtracting the$141 million in depreciation. As a result, depreciation and amortization need to be added back into the operating income number during the EBITDA calculation.
• EBITDA was $144 million for the period or$141 million + 3 million. J.C. Penney / Securities Exchange Commission EBITDA can also be calculated by taking net income and adding back interest, taxes, depreciation, and amortization, whereby: ﻿\begin{aligned} &\text{EBITDA}=\text{net profit} + \text{interest} + \text{taxes} + \text{depreciation and amortization} \end{aligned}﻿ Below is the same income statement for JC Penney Company Inc. (JCP) from May 05, 2018. However, EBITDA is calculated using the net income formula. • Net income posted a loss of -78 million for the quarter, highlighted in blue. • Depreciation was141 million, highlighted in red.
• Net interest expense was $78 million while the company had a credit or benefit from income taxes for$1 million, highlighted in green.
• EBITDA was $140 million or -$78 million + $141 million -$1 million + $78 million (net interest). Since income tax was originally a credit of$1 million, we deducted it back out to calculate EBITDA.

We can see from the above example that each EBITDA formula resulted in different profit numbers. The difference between the two EBITDA calculations can occur if companies have one-time adjustments like a credit from the sale of equipment or investment profits. As a result, both EBITDA formulas might yield slightly different results, and investors should be aware of what components make up the difference.

For JC Penney, the difference lies in the two numbers highlighted below. The pension income of $19 million and the loss from extinguishment of debt of$23 million netted out to the \$4 million difference. As a result, the EBITDA formulas can yield different results depending on whether the calculation uses the net income or the operating income formula.