How is EBITDA calculated on the income statement?

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is calculated by taking net income and adding back the depreciation and amortization expenses. This metric is significant because it provides insight into a company's operational performance by focusing on earnings derived from core business operations, excluding the effects of capital structure, tax rates, and non-cash accounting items like depreciation and amortization.

When using net income as the starting point, adding back depreciation and amortization enables a clearer view of earnings that are available to the company before these accounting deductions, making it a useful measure for comparing profitability across different companies and industries.

The other methods of calculation do not account for EBITDA correctly. One does not accurately reflect all operational earnings by merely subtracting operating expenses or using gross margin figures. Therefore, the correct calculation highlighting the core earnings performance is effectively captured by summing net income with depreciation and amortization.