What is EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation and amortization — a measure of a company's core operating profitability that removes financing and accounting effects.

EBITDA strips out items that depend on capital structure (interest), tax regime (taxes) and accounting choices (depreciation and amortization). What remains is an approximation of the cash a business generates from its core operations before financing decisions.

EBITDA is the most common profitability metric in M&A: businesses are often quoted at a multiple of EBITDA (e.g. '8x EBITDA') and bank loans are sized as a multiple of EBITDA. It allows comparison across companies with very different capital and tax structures.

Critics argue EBITDA flatters businesses that need heavy reinvestment. Warren Buffett's verdict: 'Does management think the tooth fairy pays for capital expenditures?' For asset-light services it is a good proxy; for asset-heavy manufacturing, free cash flow is fairer.

Formula

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Or: EBITDA = Revenue − Operating expenses (excluding D&A)

Example

A SaaS company with EUR 10M revenue, EUR 6M operating costs (excluding D&A), EUR 1M depreciation and EUR 0.5M interest has EBITDA of EUR 4M (40% margin) and net income of EUR 1.8M.

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Related terms

Break-Even Point

The break-even point is the sales volume at which total revenue exactly covers total costs, producing neither profit nor loss; every unit sold beyond it generates profit.

Fixed Costs

Fixed costs are business expenses that do not change with the level of output or sales in the short term — they must be paid whether you sell zero units or thousands.

Variable Costs

Variable costs are business expenses that scale directly with output or sales — every additional unit produced or delivered adds an incremental cost.

Equity

Equity is ownership in an asset after all debts secured by it have been repaid; for a company it is the residual claim of shareholders, for a property it is value minus mortgage.

Frequently asked questions

Is EBITDA the same as cash flow?+

No. It ignores working capital changes and capex, both of which can be very large. Free cash flow is a stricter cash metric.

Why do investors use EBITDA multiples?+

They normalise across capital structures and tax regimes, making companies more comparable in M&A or peer benchmarking.

What is a good EBITDA margin?+

Highly sector-dependent: software 30–50%, manufacturing 10–20%, supermarkets 3–6%. Compare within industry, not across.