No, EBITDA does not include interest income. When calculated correctly, EBITDA reflects only what a business earns from its core operations, which means passive returns like bank interest, money market yields, or income from loans the company has made are stripped out. The international accounting standard-setter describes a true EBITDA as profit or loss minus all interest income and plus all interest expense, income tax, depreciation, and amortization.1IFRS Foundation. EBITDA – Earnings Before Interest, Tax, Depreciation and Amortisation
Why Interest Income Sits Outside EBITDA
Interest income comes from sources that have nothing to do with what a company sells: cash sitting in a bank account, short-term bond holdings, money market funds, or loans extended to other parties. EBITDA is built to measure operating performance, so counting that passive income would make the business look more productive than it really is. A company holding a large cash pile could generate meaningful interest income without moving a single additional unit of product, and the metric is designed to filter exactly that kind of noise out.
Under GAAP, interest income normally appears below the operating income line, grouped with other non-operating items. The SEC has confirmed that “earnings” in EBITDA means net income as presented on the income statement under GAAP.2U.S. Securities and Exchange Commission. Non-GAAP Financial Measures Because net income already has interest income folded into it, any calculation that begins with net income has to remove that amount to keep the result focused on operations.
One boundary worth naming: this treatment applies to typical operating companies. Banks and other financial institutions earn interest as their core business rather than as a side activity, so traditional EBITDA is generally not used to evaluate them. For those firms, interest income and interest expense are the operating model, not adjustments to it.
How to Remove Interest Income From the Calculation
Two formulas are commonly used, and whether you need to subtract interest income depends on which one you start with.
Formula 1 — Starting from net income:
EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization − Interest Income
Formula 2 — Starting from operating profit:
EBITDA = Operating Profit + Depreciation + Amortization
Formula 1 requires you to manually strip out every non-operating item, and interest income is one of them. Formula 2 avoids the issue because operating profit already sits above the line where interest income and interest expense appear, so neither one is in the number to begin with. Both routes should arrive at the same figure.
A Worked Example
Suppose a company reports the following on its income statement:
- Net income: $500,000
- Interest expense: $80,000
- Income tax provision: $150,000
- Depreciation: $60,000
- Amortization: $30,000
- Interest income: $20,000
Starting with net income and adding back the non-operating items:
$500,000 + $80,000 + $150,000 + $60,000 + $30,000 = $820,000
That subtotal still contains the $20,000 the company earned on its cash reserves. Because that money is not an operating result, you subtract it:
$820,000 − $20,000 = $800,000 EBITDA
Skipping the subtraction would overstate EBITDA by $20,000, a 2.5% distortion in this small example. For companies holding large investment portfolios, the gap can be much wider.1IFRS Foundation. EBITDA – Earnings Before Interest, Tax, Depreciation and Amortisation
Interest Income vs. Interest Expense
The “I” in EBITDA stands for interest expense, and the two interest items move in opposite directions during the calculation. They sit on different lines of the income statement and serve different roles.
- Interest expense is added back to net income. Removing the cost of borrowing lets you fairly compare a heavily leveraged company against one carrying little or no debt.
- Interest income is subtracted from net income when it is present. Removing passive gains keeps the figure tied to what the company actually does for customers.
The asymmetry follows from the same logic. EBITDA is meant to show earnings before any financing effects. A financing cost gets added back; a financing gain gets taken out. Both adjustments push the number toward pure operating performance.
Why Getting This Right Matters
Miscounting interest income does not just distort a single figure. It ripples into the decisions built on top of EBITDA.
In valuation work, buyers and investors use the enterprise value-to-EBITDA ratio to compare companies across industries, tax situations, and capital structures. An inflated EBITDA lowers the ratio and makes the company look cheaper relative to its actual operating performance than it should.
In lending, commercial loan agreements often build EBITDA-based thresholds directly into their covenants. A frequent requirement is a minimum debt service coverage ratio, calculated by dividing EBITDA by total debt payments. A ratio of 2.0 or higher is generally considered healthy; a ratio near 1.0 means every dollar of operating earnings goes straight to debt service. If a borrower’s EBITDA drops below the covenant threshold, the borrower is in technical default, and the lender can demand immediate repayment of the full balance. Parties typically negotiate revised terms in practice, often at higher rates or with additional fees. Interest income wrongly baked into EBITDA can hide a covenant breach until the correction is forced.
For public companies, the calculation is not just an internal exercise. Regulation G requires that any public disclosure of a non-GAAP financial measure be accompanied by the most directly comparable GAAP measure and a quantitative reconciliation showing how the company moved from one to the other.3eCFR. 17 CFR Part 244 – Regulation G For EBITDA, the reconciliation typically starts with net income and walks through each adjustment: interest expense added, taxes added, depreciation added, amortization added, interest income subtracted. If you are reviewing a public company’s EBITDA, the reconciliation table in the earnings release or SEC filing is where you can confirm the interest income was properly removed.