EBITDA
Financials
Industry:
Sector Agnostic
Short Definition
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.
It’s a quick view of profit from core operations before financing costs (interest), tax effects, and non-cash accounting charges (D&A).
Short Definition
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.
It’s a quick view of profit from core operations before financing costs (interest), tax effects, and non-cash accounting charges (D&A).
Short Definition
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization.
It’s a quick view of profit from core operations before financing costs (interest), tax effects, and non-cash accounting charges (D&A).
Why it matters for Investors
Comparable profits: Strips out tax and financing differences so two companies can be compared fairly.
Valuation tool: EV/EBITDA multiples are a standard shorthand for valuing businesses.
Debt capacity: Lenders use EBITDA to judge how much debt a company can safely support.
Why it matters for Investors
Comparable profits: Strips out tax and financing differences so two companies can be compared fairly.
Valuation tool: EV/EBITDA multiples are a standard shorthand for valuing businesses.
Debt capacity: Lenders use EBITDA to judge how much debt a company can safely support.
Why it matters for Investors
Comparable profits: Strips out tax and financing differences so two companies can be compared fairly.
Valuation tool: EV/EBITDA multiples are a standard shorthand for valuing businesses.
Debt capacity: Lenders use EBITDA to judge how much debt a company can safely support.
Formula
Practical considerations:
What gets deducted: All normal OpEx (salaries, rent, marketing, stock-based comp, etc.) is deducted from Gross Profit.
What is added back: Only Depreciation & Amortization (D&A) are added back because they’re non-cash accounting charges.
Tie-out: EBITDA = EBIT + D&A = Net Income + Interest + Taxes + D&A.
Adjusted EBITDA (normalized): Start with EBITDA, then remove clearly one-time or non-core items (e.g., restructuring, M&A costs, legal settlements). Label and list each add-back.
Not cash: EBITDA ignores working capital, taxes, interest, and capex. Always read alongside Operating Cash Flow and Free Cash Flow.
Accounting choices matter: Capitalizing software/commissions lowers OpEx now and raises amortization later → can inflate near-term EBITDA. Keep your policy consistent and disclose if material.
Formula
Practical considerations:
What gets deducted: All normal OpEx (salaries, rent, marketing, stock-based comp, etc.) is deducted from Gross Profit.
What is added back: Only Depreciation & Amortization (D&A) are added back because they’re non-cash accounting charges.
Tie-out: EBITDA = EBIT + D&A = Net Income + Interest + Taxes + D&A.
Adjusted EBITDA (normalized): Start with EBITDA, then remove clearly one-time or non-core items (e.g., restructuring, M&A costs, legal settlements). Label and list each add-back.
Not cash: EBITDA ignores working capital, taxes, interest, and capex. Always read alongside Operating Cash Flow and Free Cash Flow.
Accounting choices matter: Capitalizing software/commissions lowers OpEx now and raises amortization later → can inflate near-term EBITDA. Keep your policy consistent and disclose if material.
Formula
Practical considerations:
What gets deducted: All normal OpEx (salaries, rent, marketing, stock-based comp, etc.) is deducted from Gross Profit.
What is added back: Only Depreciation & Amortization (D&A) are added back because they’re non-cash accounting charges.
Tie-out: EBITDA = EBIT + D&A = Net Income + Interest + Taxes + D&A.
Adjusted EBITDA (normalized): Start with EBITDA, then remove clearly one-time or non-core items (e.g., restructuring, M&A costs, legal settlements). Label and list each add-back.
Not cash: EBITDA ignores working capital, taxes, interest, and capex. Always read alongside Operating Cash Flow and Free Cash Flow.
Accounting choices matter: Capitalizing software/commissions lowers OpEx now and raises amortization later → can inflate near-term EBITDA. Keep your policy consistent and disclose if material.
Worked Example
Line item | Amount ($M) | Notes |
|---|---|---|
Revenue | $100M | Total income from operations |
COGS | $(40)M | Direct production/service costs |
Gross Profit | $60M | Revenue − COGS |
Operating Expenses (excl. D&A) | $(25)M | S&M, R&D, G&A cash costs |
Depreciation & Amortization | $(7)M | Non-cash charges |
Operating Income (EBIT) | $28M | $60M − $25M − $7M |
EBITDA | $35M | $28M + $7M |
Notes:
Start from Gross Profit: Subtract all normal operating expenses (S&M, R&D, G&A — including stock-based comp) to get Operating Income (EBIT).
Depreciation & Amortization (D&A): Non-cash charges already deducted in EBIT; add them back to see profit before accounting adjustments.
EBITDA = EBIT + D&A: $28M + $7M = $35M.
Meaning: The business generated $35M in operating profit before interest, taxes, and non-cash costs.
It helps investors gauge core operating performance and compare companies without differences in financing, tax, or asset age.
Worked Example
Line item | Amount ($M) | Notes |
|---|---|---|
Revenue | $100M | Total income from operations |
COGS | $(40)M | Direct production/service costs |
Gross Profit | $60M | Revenue − COGS |
Operating Expenses (excl. D&A) | $(25)M | S&M, R&D, G&A cash costs |
Depreciation & Amortization | $(7)M | Non-cash charges |
Operating Income (EBIT) | $28M | $60M − $25M − $7M |
EBITDA | $35M | $28M + $7M |
Notes:
Start from Gross Profit: Subtract all normal operating expenses (S&M, R&D, G&A — including stock-based comp) to get Operating Income (EBIT).
Depreciation & Amortization (D&A): Non-cash charges already deducted in EBIT; add them back to see profit before accounting adjustments.
EBITDA = EBIT + D&A: $28M + $7M = $35M.
Meaning: The business generated $35M in operating profit before interest, taxes, and non-cash costs.
It helps investors gauge core operating performance and compare companies without differences in financing, tax, or asset age.
Worked Example
Line item | Amount ($M) | Notes |
|---|---|---|
Revenue | $100M | Total income from operations |
COGS | $(40)M | Direct production/service costs |
Gross Profit | $60M | Revenue − COGS |
Operating Expenses (excl. D&A) | $(25)M | S&M, R&D, G&A cash costs |
Depreciation & Amortization | $(7)M | Non-cash charges |
Operating Income (EBIT) | $28M | $60M − $25M − $7M |
EBITDA | $35M | $28M + $7M |
Notes:
Start from Gross Profit: Subtract all normal operating expenses (S&M, R&D, G&A — including stock-based comp) to get Operating Income (EBIT).
Depreciation & Amortization (D&A): Non-cash charges already deducted in EBIT; add them back to see profit before accounting adjustments.
EBITDA = EBIT + D&A: $28M + $7M = $35M.
Meaning: The business generated $35M in operating profit before interest, taxes, and non-cash costs.
It helps investors gauge core operating performance and compare companies without differences in financing, tax, or asset age.
Best Practices
Keep definitions fixed: Use the same EBITDA formula and adjustment rules every quarter; changing what you add back breaks trend comparability.
Reconcile clearly: Always show how EBITDA ties to Operating Income (EBIT) or Net Income — investors expect a bridge.
Disclose adjustments: If you remove one-offs (e.g., restructuring, M&A, FX losses, legal costs), label it “Adjusted EBITDA” and list each add-back.
Show both value and margin: Report EBITDA ($) and EBITDA Margin (% of Revenue) side-by-side for easy comparison.
Pair with cash metrics: Compare EBITDA with Operating Cash Flow and Free Cash Flow — high EBITDA but weak cash flow signals accounting distortion.
Segment if material: Break out EBITDA by product, geography, or business unit to reveal mix differences.
Explain changes: Include a short bridge (revenue growth, margin expansion, cost shifts) so VCs see why EBITDA moved.
Avoid inflating performance: Don’t treat recurring costs (like stock comp) as “one-time.” Keep add-backs truly exceptional and temporary.
Contextualize valuation: Use EBITDA mainly for mature or revenue-stable companies; for early-stage startups, growth and gross margin often matter more.
Best Practices
Keep definitions fixed: Use the same EBITDA formula and adjustment rules every quarter; changing what you add back breaks trend comparability.
Reconcile clearly: Always show how EBITDA ties to Operating Income (EBIT) or Net Income — investors expect a bridge.
Disclose adjustments: If you remove one-offs (e.g., restructuring, M&A, FX losses, legal costs), label it “Adjusted EBITDA” and list each add-back.
Show both value and margin: Report EBITDA ($) and EBITDA Margin (% of Revenue) side-by-side for easy comparison.
Pair with cash metrics: Compare EBITDA with Operating Cash Flow and Free Cash Flow — high EBITDA but weak cash flow signals accounting distortion.
Segment if material: Break out EBITDA by product, geography, or business unit to reveal mix differences.
Explain changes: Include a short bridge (revenue growth, margin expansion, cost shifts) so VCs see why EBITDA moved.
Avoid inflating performance: Don’t treat recurring costs (like stock comp) as “one-time.” Keep add-backs truly exceptional and temporary.
Contextualize valuation: Use EBITDA mainly for mature or revenue-stable companies; for early-stage startups, growth and gross margin often matter more.
Best Practices
Keep definitions fixed: Use the same EBITDA formula and adjustment rules every quarter; changing what you add back breaks trend comparability.
Reconcile clearly: Always show how EBITDA ties to Operating Income (EBIT) or Net Income — investors expect a bridge.
Disclose adjustments: If you remove one-offs (e.g., restructuring, M&A, FX losses, legal costs), label it “Adjusted EBITDA” and list each add-back.
Show both value and margin: Report EBITDA ($) and EBITDA Margin (% of Revenue) side-by-side for easy comparison.
Pair with cash metrics: Compare EBITDA with Operating Cash Flow and Free Cash Flow — high EBITDA but weak cash flow signals accounting distortion.
Segment if material: Break out EBITDA by product, geography, or business unit to reveal mix differences.
Explain changes: Include a short bridge (revenue growth, margin expansion, cost shifts) so VCs see why EBITDA moved.
Avoid inflating performance: Don’t treat recurring costs (like stock comp) as “one-time.” Keep add-backs truly exceptional and temporary.
Contextualize valuation: Use EBITDA mainly for mature or revenue-stable companies; for early-stage startups, growth and gross margin often matter more.
FAQs
Is higher EBITDA always good?
Only if it’s sustainable and cash-backed. High EBITDA with weak cash flow, rising debt, or shrinking margins signals low-quality earnings.How is Operating Income different from EBITDA?
Operating Income (EBIT) is calculated after subtracting Depreciation & Amortisation, while EBITDA is not.Can EBITDA be negative?
Yes. A negative EBITDA means operating costs exceed gross profit — usually common in early-stage or high-growth companies still investing heavily.Is EBITDA the same as cash flow?
No. EBITDA ignores working capital changes, interest, taxes, and capital spending (capex). It’s only a proxy for cash generation, not the real cash number.
FAQs
Is higher EBITDA always good?
Only if it’s sustainable and cash-backed. High EBITDA with weak cash flow, rising debt, or shrinking margins signals low-quality earnings.How is Operating Income different from EBITDA?
Operating Income (EBIT) is calculated after subtracting Depreciation & Amortisation, while EBITDA is not.Can EBITDA be negative?
Yes. A negative EBITDA means operating costs exceed gross profit — usually common in early-stage or high-growth companies still investing heavily.Is EBITDA the same as cash flow?
No. EBITDA ignores working capital changes, interest, taxes, and capital spending (capex). It’s only a proxy for cash generation, not the real cash number.
FAQs
Is higher EBITDA always good?
Only if it’s sustainable and cash-backed. High EBITDA with weak cash flow, rising debt, or shrinking margins signals low-quality earnings.How is Operating Income different from EBITDA?
Operating Income (EBIT) is calculated after subtracting Depreciation & Amortisation, while EBITDA is not.Can EBITDA be negative?
Yes. A negative EBITDA means operating costs exceed gross profit — usually common in early-stage or high-growth companies still investing heavily.Is EBITDA the same as cash flow?
No. EBITDA ignores working capital changes, interest, taxes, and capital spending (capex). It’s only a proxy for cash generation, not the real cash number.
Related Metrics
Commonly mistaken for:
Operating Income (EBIT) (EBITDA = EBIT + Depreciation + Amortization)
Net Income (After interest, taxes, and non-operating items. EBITDA excludes those)
Cash From Operations (CFO) (Cash measure including working-capital swings; EBITDA is non-cash and ignores working-capital)
Free Cash Flow (FCF) (FCF subtracts several real cash expenses that EBITDA ignores)
Adjusted EBITDA (Excludes one-time, non-recurring, or non-operational items to present a clearer picture of the company's sustainable, ongoing earnings capacity)
Related Metrics
Commonly mistaken for:
Operating Income (EBIT) (EBITDA = EBIT + Depreciation + Amortization)
Net Income (After interest, taxes, and non-operating items. EBITDA excludes those)
Cash From Operations (CFO) (Cash measure including working-capital swings; EBITDA is non-cash and ignores working-capital)
Free Cash Flow (FCF) (FCF subtracts several real cash expenses that EBITDA ignores)
Adjusted EBITDA (Excludes one-time, non-recurring, or non-operational items to present a clearer picture of the company's sustainable, ongoing earnings capacity)
Related Metrics
Commonly mistaken for:
Operating Income (EBIT) (EBITDA = EBIT + Depreciation + Amortization)
Net Income (After interest, taxes, and non-operating items. EBITDA excludes those)
Cash From Operations (CFO) (Cash measure including working-capital swings; EBITDA is non-cash and ignores working-capital)
Free Cash Flow (FCF) (FCF subtracts several real cash expenses that EBITDA ignores)
Adjusted EBITDA (Excludes one-time, non-recurring, or non-operational items to present a clearer picture of the company's sustainable, ongoing earnings capacity)
Source of:
Components:
Index