What Is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's operating profitability by stripping out financing decisions, tax environments, and non-cash accounting charges — giving a cleaner view of how much the core business earns before those factors.
What EBITDA is and why it matters
EBITDA is a proxy for operating cash generation. By removing interest (a financing choice), taxes (a jurisdiction and structure issue), and depreciation and amortization (non-cash allocations of past spending), it lets you compare the underlying earning power of businesses with different debt loads, tax situations, or asset bases. Investors and acquirers lean on it heavily — many private-company valuations are quoted as a multiple of EBITDA. Its weakness is the flip side of its strength: because it ignores real costs like capital expenditure and interest, a company can show healthy EBITDA while still burning cash, so it should never be read in isolation.
A worked example
A SaaS company reports the following for the year: revenue $2,000,000, operating expenses $1,400,000, depreciation $80,000, amortization $40,000, interest expense $60,000, and taxes $90,000. Net income is $330,000. To get EBITDA, start from net income and add back the four excluded items: $330,000 + $60,000 (interest) + $90,000 (taxes) + $80,000 (depreciation) + $40,000 (amortization) = $600,000 EBITDA. The same figure equals operating income ($600,000) plus D&A — two paths to the same number.
How firms handle it today
Firms typically calculate EBITDA in a spreadsheet off the client's income statement, adding back D&A from the depreciation schedule and interest and taxes from the ledger. Getting it right depends on clean, correctly classified financials underneath.
Related terms
- Net income
- Operating expenses
- Depreciation
- Amortization
- Gross margin
FAQ
How is EBITDA different from net income?
Net income is the bottom-line profit after all expenses. EBITDA adds back interest, taxes, depreciation, and amortization to isolate operating performance.
Is a higher EBITDA always better?
Higher generally signals stronger operating profit, but EBITDA ignores capital spending and interest, so a high figure can still hide weak free cash flow.
What is a good EBITDA margin?
It varies widely by industry; software businesses often run 20–40%+, while low-margin sectors run in single digits. Compare within an industry, not across.