EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is a measure of a company's earnings before these expenses, helping business owners, investors and buyers compare operating performance and estimate business value.
Illustrative example using simplified financial figures.
Depending on financial statement presentation, other non-operating items may need to be considered when reconciling EBITDA.
Alternative Formula
EBITDA = Operating Profit (EBIT) + Depreciation + Amortisation
If operating profit is already known, EBITDA can generally be calculated by adding back depreciation and amortisation. Unusual or non-operating items and financial statement definitions may require reconciliation.
These measures describe different aspects of business performance and should not be confused.
Net Profit
What remains after a business's recognised expenses, interest and taxes.
EBITDA
Earnings before interest, taxes, depreciation and amortisation. Useful for comparing operating performance.
Cash Flow
The actual cash generated or used by a business, taking account of cash receipts, payments and investment.
EBITDA is not cash flow.
A business can generate positive EBITDA while experiencing cash shortages because of capital expenditure, debt obligations or working capital requirements.
Business buyers and investors often use EBITDA multiples to estimate the enterprise value of an established business. The appropriate multiple depends on its industry, size, growth, risk and earnings quality.
Annual EBITDA
$250,000
Valuation Multiple
5×
Indicative Enterprise Value
$1,250,000
Valuation Sensitivity
4×
$1,000,000
5×
$1,250,000
6×
$1,500,000
Illustrative multiples, not universal market benchmarks.
Enterprise value represents the estimated value of the operating business. The amount received by shareholders may differ after accounting for debt, cash and transaction adjustments.
The 5× multiple used in this example is illustrative. Actual EBITDA multiples depend on industry, company size, growth, recurring revenue and other factors.
Explore EBITDA Multiples by Industry →EBITDA margin measures EBITDA as a percentage of revenue. It helps compare operating earnings relative to business size.
EBITDA Margin = EBITDA ÷ Revenue × 100
A 25.0% EBITDA margin means the business generates $25 of EBITDA for every $100 of revenue.
There is no universally good EBITDA margin. Margins vary significantly across industries, business models and capital requirements.
EBITDA is useful, but it does not provide a complete picture of financial performance or business value.
Capital Expenditure
EBITDA does not deduct spending on long-term assets such as machinery, equipment and property.
Working Capital
It does not capture changes in cash tied up in inventory, receivables and other operating requirements.
Debt and Financing
It excludes interest expense and does not reflect debt principal repayments.
Earnings Quality
It does not establish whether earnings are recurring, sustainable or supported by reliable cash generation.
EBITDA is a starting point, not a complete valuation.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It measures earnings before these specified expenses and is widely used in financial analysis and business valuation.
EBITDA is a way of measuring business earnings before interest, taxes and certain non-cash accounting expenses. It helps compare operating performance between businesses, but it does not show how much cash a business generates.
Start with net income and add back interest expense, income tax expense, depreciation and amortisation. Alternatively, start with operating profit (EBIT) and add back depreciation and amortisation, assuming consistent financial statement definitions.
No. EBITDA differs from net profit because it excludes interest, taxes, depreciation and amortisation. Net profit generally reflects these expenses.
No. EBITDA does not account for capital expenditure, changes in working capital, debt repayments and other cash movements. A business can report positive EBITDA while generating little or negative free cash flow.
A good EBITDA margin depends on the industry, business model, competitive environment and capital requirements. There is no single percentage that applies to every business.
Adjusted EBITDA is EBITDA modified to exclude certain items considered unusual, non-recurring or not representative of ongoing performance. These adjustments can be subjective and should be assessed carefully.
Yes. Negative EBITDA means the earnings measure is below zero. It may occur when operating expenses are high relative to revenue, including in businesses investing heavily in growth.
Investors use EBITDA to compare earnings across businesses with different financing arrangements, tax positions and depreciation policies. It is one of several measures used to assess profitability and valuation.
EBITDA multiples relate a company's earnings to an indicative enterprise valuation. Buyers consider the multiple alongside growth, risk, customer concentration, recurring revenue and earnings quality.
There is no universal EBITDA multiple. Multiples vary by industry, business size, profitability, growth, risk and market conditions. SME Multiples provides indicative ranges across hundreds of industries.
EBIT stands for Earnings Before Interest and Taxes. EBITDA additionally excludes depreciation and amortisation, making it generally higher than EBIT when those expenses are positive.
Revenue is the income generated from sales before expenses. EBITDA reflects earnings after relevant operating expenses, excluding interest, taxes, depreciation and amortisation.
An owner's salary is generally included as an operating expense. In owner-managed businesses, buyers may adjust earnings to reflect a market-rate replacement salary if the owner's compensation is unusually high or low.
Yes. EBITDA multiples are commonly used to value established small and medium-sized businesses. Very small owner-operated businesses may instead be assessed using seller's discretionary earnings or other methods, depending on their circumstances.
Discover indicative EBITDA valuation multiples across hundreds of industries, supported by real-world transaction case studies.