Build EBITDA from net income
For a straightforward example, add interest expense, income tax expense, depreciation and amortization to net income. Real reconciliations may include interest income, noncontrolling interests or other complications. Read the issuer’s reconciliation instead of assuming that operating income plus depreciation always produces its reported EBITDA.
Harbor Tools reports net income 12, interest expense 3, income tax 3, and depreciation/amortization 6, all in millions. EBITDA is 12 + 3 + 3 + 6 = 24. Revenue is 120, so EBITDA margin is 20%. The formula is an accounting bridge, not evidence that 24 arrived in the bank.
Profit, EBITDA and cash answer different questions
Read the chart data
| Measure | USD millions |
|---|---|
| Net income | 12 |
| EBITDA | 24 |
| Adjusted EBITDA | 27 |
| Free cash flow | 3 |
Treat adjusted EBITDA as a separate definition
Management also excludes stock compensation of 2 and restructuring expense of 1. Its adjusted EBITDA is therefore 27, with a 22.5% margin. Those extra exclusions do not belong in unmodified EBITDA simply because the company considers them useful.
Ask whether stock compensation recurs and can dilute shareholders; ask whether “one-time” restructuring appears repeatedly. An adjustment can remove a volatile accounting effect while still removing a real economic cost. Compare the actual reconciliation across years and peers, not just the label.
Connect the measure to cash and debt
Harbor’s operating cash flow is 11 and capital expenditures are 8, leaving illustrative FCF of 3. EBITDA of 24 ignores the cash timing of collections and inventory, interest and taxes, and spending on equipment. A capital-intensive business may require substantial reinvestment just to stand still.
If net debt is 50 and trailing-twelve-month EBITDA is 80, net debt/EBITDA is 0.625×. Do not divide the same debt by the quarterly 24 and compare that result with a peer’s annual ratio. Debt-covenant EBITDA can have a specific contractual definition that differs from the presentation in an earnings release.
Use the number for a specific question
EBITDA can make some comparisons less dependent on financing and depreciation policies, but it is poorly suited to every industry. For lenders, interest is central to operations; for businesses with heavy asset replacement, cash investment remains essential.
Record the definition, period, reconciliation and purpose beside the number. A useful company note reads “EBITDA 24, adjusted 27; the 3 difference consists of identified exclusions; FCF 3 after investment.” That is more informative than calling EBITDA either pure cash or universally meaningless.
Harbor has EBITDA 24 and adjusted EBITDA 27. How much free cash flow did it generate?
Show the explanation
That cannot be inferred from either EBITDA figure. The separate cash-flow example gives operating cash of 11 less capital spending of 8, or 3. Reconcile each measure.
Sources and editorial notes
Original explanations and hypothetical examples prepared with AI assistance. Primary reference check dates are listed below. Numerical examples are hypothetical unless explicitly identified otherwise.
- SEC: Non-GAAP Financial Measures
EBITDA reconciliation to net income, non-GAAP definition and free-cash-flow presentation. Original arithmetic does not certify issuer compliance. Checked October 17, 2026.
- SEC: Beginners’ Guide to Financial Statements
Income statement, balance sheet and cash-flow statement purposes and relationships. Checked October 17, 2026.
- SEC: How to Read a 10-K
Filing structure, management discussion, financial statements and risk disclosures. Harbor Tools and every numerical walkthrough are original fictional examples. Checked October 17, 2026.