What Is EBITDA? Meaning, Formula and Example

Mohammed Aamir ShaikhFounder, Aamir Capital

Updated 5 October 20263 min read

The short answerEBITDA stands for earnings before interest, tax, depreciation and amortisation. It is a measure of operating profit that removes financing choices, tax and accounting write-offs, so businesses are easier to compare.

How it works

EBITDA starts from operating profit (EBIT) and adds back depreciation and amortisation. Many analysts then adjust it for one-off items to get normalised or adjusted EBITDA. Buyers and lenders usually focus on the adjusted figure.

EBITDA is popular for valuation (EV/EBITDA) and for lending (net debt to EBITDA). But it is not cash flow. It ignores the money a business must spend on equipment and working capital, so a business with high EBITDA can still generate little cash.

EBITDA = EBIT + Depreciation + Amortisation

EBITDA margin = EBITDA ÷ Revenue

A simple example

Revenue is 1,000. Operating profit (EBIT) is 150. Depreciation and amortisation are 50. EBITDA = 150 + 50 = 200, which is an EBITDA margin of 20%.

How it is used

Comparing the profitability of similar businesses.
Valuing companies with EV/EBITDA multiples.
Judging how much debt a business can carry.

Common mistakes

Treating EBITDA as cash flow.
Ignoring heavy capital spending.
Comparing adjusted EBITDA from companies that adjust differently.
Using EBITDA for businesses where interest and capital are central to the model, such as banks.

Questions

What is a good EBITDA margin?

It depends on the industry. Software businesses may exceed 30%, while distribution businesses may be below 10%. Compare with similar companies.

What is the difference between EBITDA and EBIT?

EBIT is measured after depreciation and amortisation. EBITDA is measured before them.

Keep learning

For education only. This page is general information. It is not financial, investment, legal or tax advice, and it does not take your situation into account.

What is EBITDA?