EBITDA

What Is EBITDA?

EBITDA strips away factors that can obscure how well a business performs at its core operations. By removing interest (a function of how you finance the business), taxes (which vary by jurisdiction), and depreciation and amortization (non-cash charges), EBITDA isolates the cash profit generated by day-to-day business activities.

The formula is: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. If your business has $100,000 in net income, $15,000 in interest, $25,000 in taxes, and $20,000 in depreciation and amortization, your EBITDA is $160,000.

Why It Matters for Your Business

EBITDA is one of the first numbers potential buyers, investors, and lenders will ask about because it provides a standardized view of operating profitability.

• Business valuation: Companies are often valued as a multiple of EBITDA. If your industry trades at 5x EBITDA and yours is $200,000, your business might be valued around $1,000,000.
• Comparison tool: Since EBITDA removes financing and tax differences, you can meaningfully compare your performance against competitors regardless of their capital structure.
• Operational focus: Tracking EBITDA over time shows whether your core operations are becoming more or less efficient, independent of accounting choices.

Keep in mind that EBITDA has limitations. It does not account for capital expenditures, working capital needs, or debt payments. A company with high EBITDA but massive debt service obligations may still be in financial trouble.