What is EBITDA?
EBITDA focuses on the profit generated by a company's core operations. By removing interest (a financing decision), tax (driven by jurisdiction) and [depreciation](/glossary/depreciation) and [amortization](/glossary/amortization) (non-cash accounting charges), it approximates operating cash earnings.
Formulas
EBITDA = Net income + Interest + Taxes + Depreciation + Amortisation
or
EBITDA = Operating profit (EBIT) + Depreciation + Amortisation
EBITDA margin = EBITDA ÷ Revenue
Example
Revenue $1,000,000; operating expenses (excluding D&A) $750,000; depreciation $40,000; interest $20,000; tax $45,000.
- EBITDA = 1,000,000 − 750,000 = $250,000 (25% margin)
- EBIT = 250,000 − 40,000 = $210,000
- Net income = 210,000 − 20,000 − 45,000 = $145,000
Uses
- Business valuation, often as an enterprise value / EBITDA multiple
- Lender covenants and debt capacity (debt / EBITDA)
- Comparing peers with different financing or asset bases
Limitations
EBITDA is not defined by IFRS or GAAP. It ignores [capital expenditure](/glossary/capital-expenditure), working capital needs, interest and tax, all of which consume real cash. Use it alongside [free cash flow](/glossary/free-cash-flow). See also [adjusted EBITDA](/glossary/adjusted-ebitda).