EBITDAEBITDA
EBITDA is earnings before interest, taxes, depreciation and amortisation — a rough measure of operating profit before financing and accounting charges. Dividing enterprise value by EBITDA gives the EV/EBITDA multiple. It ignores capital spending, so it can flatter capital-heavy businesses.
EBITDA is one of the most quoted numbers in company results and takeover talk. It strips out interest, taxes and non-cash charges to show how much the core business earns. That makes companies easier to compare — but also makes it easy to forget the bills EBITDA leaves out.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Earnings before interest, taxes, depreciation and amortisation, Earnings before interest, taxes, depreciation and amortization
- Updated
EBITDA in plain words
EBITDA stands for earnings before interest, taxes, depreciation and amortisation.1
Stripping out financing and some accounting choices aims to show how the core business performs.2
It is not a standardised GAAP or IFRS measure.2 See Earnings.
How to calculate EBITDA, step by step
Start with operating income
Take operating income (EBIT) from the income statement.
Add back D&A
Add back depreciation and amortisation, which are non-cash charges.3
Or build up from net income
Alternatively, add interest, taxes, depreciation and amortisation back to net income.
Check for adjustments
Measures calculated differently should be labelled, for example, 'Adjusted EBITDA'.1
Compare across companies
EBITDA helps compare profitability across different capital structures and tax strategies.2
Compare with capex
For capital-intensive companies, the gap between EBITDA and cash after capex can be substantial.3
Worked examples
Example 1 — From EBIT to EBITDA
EBITDA $55mA company reports EBIT of $40m and depreciation and amortisation of $15m.
| EBIT | $40m |
| Add D&A | +$15m |
| EBITDA | $55m |
EBITDA adjusts operating income by adding back depreciation and amortization.3
Example 2 — EV/EBITDA multiple
8xThe same company has an enterprise value of $440m.
| Enterprise value | $440m |
| EBITDA | $55m |
| EV/EBITDA | $440m ÷ $55m = 8x |
The EV/EBITDA multiple divides enterprise value by EBITDA.4
Example 3 — Same EBITDA, different capex
B keeps $30m lessCompany A and Company B each earn $50m EBITDA. A spends $10m a year on capex, B spends $40m.
| A: EBITDA − capex | $50m − $10m = $40m |
| B: EBITDA − capex | $50m − $40m = $10m |
Capital-heavy companies show higher EBITDA by excluding depreciation, yet their assets still need replacing.2
EBITDA vs other profit measures
| Aspect | What it excludes | Best for |
|---|---|---|
| Net income | Nothing — bottom line | Shareholder earnings, EPS |
| EBIT | Interest and taxes | Operating profit after D&A |
| EBITDA | Interest, taxes, D&A | Comparing operations across capital structures |
| Free cash flow | Nothing cash-related; subtracts capex | Cash actually generated |
Where EBITDA is used
Valuation multiples
EV/EBITDA compares companies regardless of debt levels.
Loan covenants
Lenders often set debt limits as multiples of EBITDA.
Peer comparisons
Comparing operating profitability within an industry — see Fundamental Analysis.
Takeover analysis
Buyers estimate what they pay per unit of operating profit.
Advantages and disadvantages
Advantages
- Easy to compare across companies with different debt and tax.
- Close to operating cash before capex and working capital.
- Widely reported and understood.
- Useful input for valuation multiples.
Disadvantages
- Ignores capital spending.
- Not a GAAP or IFRS measure, so definitions vary.
- 'Adjusted' versions can exclude real costs.
- Ignores interest and taxes that must be paid.
Going deeper
Read as far as you need. Each level builds on the one before it.
Profit before some costs
Beginner
EBITDA is earnings before interest, taxes, depreciation and amortization.1
Why analysts like it
Intermediate
Common mistakes
Treating EBITDA as cash
Forgetting capex, working capital, interest and taxes.
Trusting 'adjusted' figures blindly
Not checking what was added back.
Comparing across industries
Using one EV/EBITDA level for very different businesses.
Ignoring debt
High EBITDA does not mean a company can carry any amount of debt.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- EBITDA = earnings before interest, taxes, depreciation and amortisation.
- It shows operating profit before financing and some accounting charges.
- EV/EBITDA is a common valuation multiple.
- It is not a GAAP or IFRS measure; check definitions.
- It ignores capex, so it can flatter capital-heavy companies.
Frequently asked questions
Is EBITDA the same as cash flow?
What is adjusted EBITDA?
What is a good EV/EBITDA?
Further learning
- Earnings
The bottom-line profit EBITDA starts from.
- Price-to-Earnings Ratio
Another common valuation multiple.
- Fundamental Analysis
How EBITDA fits company analysis.
- Market Capitalisation
The equity part of enterprise value.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. SEC (Division of Corporation Finance). Non-GAAP Financial Measures (interpretations) (opens in a new tab) Checked .
- Corporate Finance Institute. What Is EBITDA? (opens in a new tab) Checked .
- Wall Street Prep. EBITDA (opens in a new tab) Checked .
- NYU Stern (Aswath Damodaran). Valuation: Packet 2 — Relative Valuation (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.