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Home / Accountant Library / Glossary / Financial analysis and ratios

Earnings before interest, taxes, depreciation and amortization

EBITDA

In one sentenceA measure of operating profitability calculated by adding finance costs, Zakat or tax, depreciation and amortization back to net profit.

Simply put

This measure removes from profit three things that have nothing to do with day-to-day operating efficiency: how the business is financed (interest), Zakat or tax, and depreciation and amortization, because they are expenses with no cash going out in the same year.

It helps you when comparing two businesses with different financing, or when estimating how much cash the business generates before repaying loans. But it is not actual cash: it does not deduct buying new equipment or the change in inventory and receivables.

Worked example

A plastics factory made a net profit of 300,000 SAR, paid loan interest of 50,000 SAR, charged Zakat of 20,000 SAR, and depreciation and amortization of 130,000 SAR.

Net profit300,000 SAR
+ Interest50,000 SAR
+ Zakat20,000 SAR
+ Depreciation and amortization130,000 SAR
EBITDA = 300,000 + 50,000 + 20,000 + 130,000500,000 SAR

Formula: Net profit + interest + Zakat or tax + depreciation + amortization

Don't confuse it with

Earnings before interest and taxesEBIT keeps depreciation and amortization deducted, so it is lower than EBITDA in a business with many assets.

in FullScreen ERP

The periodic depreciation entry is posted to the general accounts automatically, so the depreciation amount is ready to add back when you calculate. Fixed assets