Two acronyms dominate analyst speech, so get them right:
EBIT = operating profit(earnings before interest and taxes)EBITDA = EBIT + depreciation and amortization(D&A added back)
Why add back D&A? Depreciation spreads the past cash cost of long-lived assets over their useful lives. You met it as an adjusting entry in the equation and double-entry module, and the long-term-assets module ahead goes into full depth. Two identical factories bought in different years, or depreciated over different assumed lives, produce different EBITs from identical operations. EBITDA strips that estimate away. What's left is a rough proxy for operating cash generation that doesn't depend on depreciation policy or capital structure. Lenders lean on it because debt covenants live on net debt/EBITDA, and acquirers lean on it through EV/EBITDA multiples.
Where does D&A sit in US and Indian statements?
Now the placement problem. Where D&A actually sits differs by format, and finding it is a mechanical skill.
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- US 10-K (by-function format): D&A is buried inside the function lines. Manufacturing depreciation goes inside COGS. Office and equipment depreciation goes inside SG&A. It's usually not a visible P&L line. The reliable source is the cash flow statement, or the PP&E note, where total D&A is shown as an add-back. So
EBITDA (US route) = operating income + D&A from the cash flow statement. If you add back only the depreciation you can see on the P&L face, you'll undercount. - India Schedule III (by-nature format): "Depreciation and amortisation expense" is its own mandated line, visible and complete. The standard Indian analyst build is
EBITDA (India route) = PBT before exceptional items + finance costs + D&A − other income. Subtracting other income matters, because you want the earning power of operations and not of the treasury portfolio.
Is EBITDA the same as cash?
EBITDA is not cash. Get this into your bones before anyone teaches you otherwise. Three real claims stand between EBITDA and cash an owner can spend. First, working capital. Receivables and inventory absorb cash as the business grows, and EBITDA counts a credit sale as if it were collected. Second, capex. Depreciation is excluded, but the depreciating assets will have to be replaced with real cash one day. Third come interest and taxes, which really are payable in cash. Charlie Munger's mnemonic was to substitute "bullshit earnings" every time you see "EBITDA." It's deliberately rude, and it isn't wrong. EBITDA is a comparison tool. It never measures owner cash flow, and Phase 2 quantifies the gap with CFO/EBITDA and FCF conversion.