EBITDA

Quick Definition

Earnings Before Interest, Taxes, Depreciation, and Amortization, a measure of operational profitability excluding financing and accounting effects.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operational profitability by excluding financing decisions, tax strategies, and non-cash accounting charges.

EBITDA shows how much cash profit your core business operations generate before capital structure and accounting adjustments. It's widely used for company comparisons and valuation.

Why EBITDA Matters

EBITDA strips out factors that vary between companies but don't reflect operational performance. Two companies with identical operations might have different net income due to different debt levels, tax situations, or depreciation schedules. EBITDA makes them comparable.

Acquirers often value companies as a multiple of EBITDA. SaaS companies might trade at 10-20x EBITDA, while traditional businesses trade at 5-10x.

How to Calculate EBITDA Step by Step

Step 1: Start with your net income. Pull this from your income statement or accounting software. If you're pre-profit, this will be a negative number — that's fine.

• Net Income: -$120,000 (annual)

Step 2: Add back interest expense. Any interest paid on loans, lines of credit, or venture debt.

• Interest: $15,000

Step 3: Add back taxes. Income taxes paid or owed.

• Taxes: $0 (common for unprofitable startups)

Step 4: Add back depreciation and amortization. These are non-cash charges from your accounting software. Depreciation covers physical assets (computers, equipment). Amortization covers intangible assets (patents, capitalized software development).

• Depreciation: $18,000
• Amortization: $30,000

Step 5: Sum it up.

• EBITDA = -$120K + $15K + $0 + $18K + $30K = -$57,000
• Revenue: $2,400,000
• EBITDA Margin = -$57K ÷ $2.4M = -2.4%

You're still EBITDA-negative, but much closer to operational breakeven than net income suggests. The $63K gap between net income and EBITDA represents non-operational costs.

Shortcut method: If your accounting software gives you operating income, you can use: EBITDA = Operating Income + D&A. This skips the interest and tax add-backs.

Common mistakes founders make:

• Adding back stock-based compensation (that's "Adjusted EBITDA" — a different metric, and investors are increasingly skeptical of it)
• Excluding one-time costs that are actually recurring (if you have "one-time" restructuring costs every year, they're not one-time)
• Using EBITDA as a proxy for cash flow (it ignores working capital changes and capex)
• Not distinguishing between EBITDA and Adjusted EBITDA in investor conversations

EBITDA Limitations

EBITDA ignores real costs like interest payments and capital expenditures. A company with heavy debt or equipment needs might look profitable on EBITDA but struggle with cash flow. Always look at EBITDA alongside other metrics.

Formula

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Or: EBITDA = Operating Income + Depreciation + Amortization

EBITDA Margin = EBITDA ÷ Revenue

Example

Annual financials:

• Revenue: $5,000,000
• Operating expenses: $4,200,000
• Operating income: $800,000
• Depreciation: $100,000
• Amortization: $50,000

EBITDA = $800,000 + $100,000 + $50,000 = $950,000

EBITDA Margin = $950K ÷ $5M = 19%