The income statement runs from revenue at the top to net income at the bottom, subtracting one kind of cost at a time:
- Gross profit = revenue - cost of goods sold. Gross margin = gross profit / revenue.
- Operating income (EBIT) = gross profit - operating expenses such as SG&A, and any operating charges.
- Net income = EBIT - interest - taxes.
EBITDA adds depreciation and amortization back to EBIT. Many companies don't show D&A as its own line: it sits inside cost of goods sold and SG&A, and the amounts appear in a note or on the cash flow statement. Add back all of it, wherever it is.
Adjusted EBITDA also adds back one-off items, such as a restructuring charge, to show the ongoing business. Companies choose their own adjustments, so check what was added back before you compare two companies.
Margins (each subtotal divided by revenue) make companies of different sizes comparable.