Definition (canonical)
EBITDA is earnings before interest, taxes, depreciation and amortization — operating profit with non-cash depreciation added back. It approximates the raw earning power of the core business, stripped of financing structure, tax regimes and accounting write-offs, which is why it dominates company comparisons and valuations.
Formula and a quick example
`EBITDA = operating profit + depreciation + amortization` (equivalently: net profit + interest + taxes + D&A). A factory with 15 operating profit and 10 of depreciation has EBITDA of 25 — the machine write-offs reduced accounting profit but took no cash this year. Two firms with identical operations but different debt loads and tax jurisdictions show the same EBITDA, which is exactly the point.
Where EBITDA earns its keep
Valuation: the most common price shorthand in M&A is an EV/EBITDA multiple — "the company sold for 6× EBITDA." Credit: banks set covenants as debt/EBITDA. Benchmarking: comparing capital-heavy businesses across borders, EBITDA removes the noise of depreciation policies and financing choices that distort net results. In due diligence you will also meet "adjusted EBITDA" — management's version with one-offs removed; always read the adjustments line by line, because that is where optimism hides.
Where it badly misleads
Depreciation is not fictional — machines really wear out and must be replaced. A business that must reinvest heavily every year can show fat EBITDA and burn cash forever; the honest cross-check is cash flow and capex. EBITDA also ignores working-capital swings and says nothing about debt service actually due. Treat it as a comparison lens, never as "cash the owner can take home."
FAQ
Is EBITDA defined by accounting standards? No — it is a market convention, not an IFRS line item. That flexibility is why definitions must be pinned down in every contract.
EBITDA vs operating profit? Operating profit includes depreciation as a cost; EBITDA adds it back on top. For asset-light companies the two land close together; for asset-heavy ones they diverge hugely.
What is a good EBITDA margin? Industry-relative only: telecoms run 30–40%, distribution single digits. Compare within the sector and across time.
Why do startups love EBITDA? Because heavy early investment makes net results ugly while EBITDA looks respectable. Fine as a lens — dangerous as the only number, especially when "adjusted" removes costs that are, in truth, recurring.
Related: Profit · P&L Statement · Business Valuation · Cash Flow Reviewed: 2026-07-15 · Sources: corporate finance canon