What Is EBITDA

Your privacy

BDC uses cookies to improve your experience on its website and for advertising purposes, to offer you products or services that are relevant to you. By clicking ῝I understand῎ or by continuing to browse this site, you consent to their use.

To find out more, consult our Policy on confidentiality.

I understand

Trade uncertainty: Explore resources and tools for your business.

Trade uncertainty: Explore solutions, resources, and tools for your business.

• Home
• >
• Articles and tools
• >
• Entrepreneur's toolkit
• >
• Templates for download
• >
• Glossary
• >
• EBITDA

Back to glossary Definition EBITDA EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, helps evaluate a business’s core profitability. Skip to main content Table of contents

1. What is EBITDA?
2. Does EBITDA mean profit?
3. How is EBITDA calculated?
4. Example of an EBITDA calculation
5. What is a good EBITDA?
6. What does EBITDA tell us and how is it used?
7. What is EBITDA margin?
8. Why is EBITDA so important?
9. How is EBITDA used in acquisitions and buyouts?
10. Is EBITDA the same as gross profit?
11. Is EBITDA the same as operating profit?
12. Is EBITDA the same as the bottom line?
13. Does EBITDA include salaries?
14. What is adjusted EBITDA?
15. What is the negative side of EBITDA?
16. Next step

View more

EBITDA is short for earnings before interest, taxes, depreciation and amortization. It is one of the most widely used measures of a company’s financial health and ability to generate cash.

“EBITDA is a key indicator of a business’s performance, profitability, value and ability to add debt,” says Fanny Cao, a CPA, CGA and Senior Advisor, Financial Products at BDC.

“It’s a clean picture of the core profit of a company and a good shortcut to give a quick picture of its available cash flow.”

Recommended Guide to managing cash flow

How to improve cash flow and keep it under control.

Download

The Taking Control of Your Cash Flow guide will be sent to you by email.

Email address First name Last name Business phone Job role -- Select an option -- Business Owner Executive / C-Level (CEO, CFO, COO) Manager Employee / Individual Contributor Self-employed Academic / Researcher Retired Student Future Entrepreneur Unemployed Company name Industry -- Select an option -- Aerospace Agriculture, Forestry, Fishing and Hunting Arts, Entertainment and Recreation Automative and Vehicle Retail Business and Customer Services Construction and Engineering Consulting Defense Educational Energy and Utilities Financial Services Food and Beverage Services Government and Public Administration Health Services Insurance IT and Technology Manufacturing Media and Publishing Mining, Quarrying, and Oil and Gas Extraction Non-Profit Pharmaceuticals Commercial Real Estate Restaurants Retail Telecommunications Tourism and Hospitality Transportation and Warehousing Wholesale and Distribution Other Annual sales -- Select an option -- < $100,000 $100,000 - $499,999 $500,000 - $999,999 $1M - $2,999,999 $3M - $4,999,999 $5M - $9,999,999 $10M - $24,999,999 $25M - $49,999,999 >= $50M Established in I accept that BDC send me, via email, business advice, articles and tools as well as information about its solutions and events. I can withdraw my consent at any time. Submit

If you are unable to submit the form, please refresh the page or contact us.

Please refer to our Privacy Policy or Contact us for more details.

EBITDA allows you to compare two companies in different locations, decide how much a business is worth and benchmark it against industry averages.

What is EBITDA?

EBITDA provides a measure of a business’s core profitability after stripping out factors that aren’t in the company’s control or that may distort earnings, such as:

• InterestInterest can vary depending on the company’s credit history, financing structure and location.
• TaxesTaxes can vary depending on where the company is located.
• Amortization and depreciation Amortization refers to tangible assets such as buildings and equipment, as well as intangible assets such as software and patents. All of these assets are amortized over their useful life. Depreciation reduces the value of the assets due to factors external to the business, such as inflation and economic conditions.

“EBITDA allows you to compare two companies in different locations, decide how much a business is worth and benchmark it against industry averages,” Cao says.

EBITDA isn’t normally included on a company’s income statement because it isn’t a metric recognized by Generally Accepted Accounting Principles as a measure of financial performance.

In this video, BDC Manager Nicolas Leblanc explains what is EBITDA and why it's a key indicator for quickly assessing your company's profitability.

Does EBITDA mean profit?

EBITDA is not equivalent to profit. Profit is the amount of money a company earns after all expenses have been deducted from its revenue.

EBITDA is a measure of a company’s operating performance. It does not account for non-operating expenses such as interest on debt, taxes and other costs.

How is EBITDA calculated?

EBITDA is calculated with the following formula, using elements found in the income statement.

EBITDA formula

Net profit + Interest + Taxes + Depreciation and Amortization

Note that only interest on short- and long-term debt should be added in the formula. Other types of interest should not be included, such as interest on accounts receivable. It’s important to have a breakdown of the interest line in the income statement to ensure the correct figure is added.

Also, only income tax should be added in the formula; not other types of tax such as property, payroll and sales taxes.

Example of an EBITDA calculation

In the example below, we see XYZ Co.’s EBITDA:

Net income	$922,251
Interest	$103,900
Income taxes	$31,250
Depreciation and amortization	$145,000
EBITDA	$1,202,401

Enlarge the image

What is a good EBITDA?

The EBITDA ratio varies by industry, but as a general guideline, an EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.

What does EBITDA tell us and how is it used?

EBITDA is widely used by businesses, valuators, bankers and others to compare a company’s financial performance to industry peers and gauge its profitability before non-core expenses and charges.

1) Businesses and valuators

Entrepreneurs and business valuators often use EBITDA to calculate a company’s valuation for purposes of a business sale or acquisition. A common valuation method is to apply a multiple to EBITDA to determine how much the business is worth. The specific multiple can vary depending on many factors, such as market conditions, industry and location.

2) Financial institutions

Bankers use EBITDA to understand how much cash flow a company has available to pay for long-term debt. Bankers also use it to calculate a company’s debt coverage ratio, which is another measure of its ability to make debt payments.

“EBITDA is widely used in the financial industry,” Cao says. “It makes it easy to compare the core profit and potential of two companies in the same industry.”

Financial institutions also often use EBITDA as part of loan conditions known as debt covenants. For example, a business may be required to maintain a certain debt coverage ratio as a loan condition.

What is EBITDA margin?

The EBITDA margin shows how much of each dollar of revenue is left after paying for operating expenses, excluding non-cash items and financing costs.

It is calculated by dividing EBITDA by the total revenue of the company.

The EBITDA margin can be used to compare the performance of different companies in the same industry, or to evaluate the changes in a company’s profitability over time. A higher EBITDA margin indicates that the company is more efficient and profitable, while a lower EBITDA margin suggests that the company is less efficient and profitable.

The formula for calculating the EBITDA margin is as follows:

EBITDA Margin = EBITDA / Revenue

For example, if a company has an EBITDA of $50 million and a revenue of $100 million, its EBITDA margin is 50%. This means that for every dollar of revenue, the company has 50 cents left after paying for its operating expenses.

What is the difference between EBITDA, EBT and EBIT?

Earnings before taxes (EBT) measures a company’s profitability before income taxes are deducted. It’s the amount of operating income left after interest on debt, depreciation and non-operating income and expenses are factored in.

EBT is often seen as a truer reflection of profitability than net income because companies pay tax at varying rates in different jurisdictions. In the sample income statement above, EBT is $953,501.

Earnings before interest and taxes (EBIT) goes a step beyond EBT to also remove the impact of interest. The idea is to account for the fact that companies don’t carry the same debt loads and pay different interest rates depending on location and other factors.

In the income statement above, EBIT is calculated this way:

EBT	$953,501
Interest
Interest	$103,900
Depreciation and amortization
EBIT	$1,057,401

Why is EBITDA so important?

EBITDA is important because it is one of the metrics most commonly used by businesses, valuators, bankers, investors and others to gauge a company’s profitability, performance and valuation.

It also provides a clearer picture of a company’s financial health and profitability than net income alone. By adding back interest, taxes, depreciation, and amortization to a company’s net income, EBITDA attempts to represent the cash profit generated by the company’s operations.

How is EBITDA used in acquisitions and buyouts?

During a business acquisition, the buyer often hires a professional business valuator to produce an independent valuation of the target company. The valuator is typically given access to financial documents and other information to establish a fair market value for the business.

A common valuation method is to apply a valuation multiple, which may be based on EBITDA, revenue or other metrics. After due diligence, the parties may revise the offer price based on an adjusted EBITDA or different multiplier depending on what was discovered.

It’s important to look at EBITDA alongside other indicators to get a true idea of a company’s financial health.

Is EBITDA the same as gross profit?

No, gross profit (sometimes called gross margin) is the amount of money left after subtracting the cost of goods sold (for manufacturing companies) or cost of sales (for retailers and wholesalers).

In the income statement above, gross profit is $2,227,500.

Is EBITDA the same as operating profit?

No, operating profit (also called operating income) is what is left over after operating expenses (also called selling, general and administrative expenses, or SG&A) are subtracted from gross profit. In the example above, operating profit is $1,212,401.

Is EBITDA the same as the bottom line?

No, the bottom line (also known as net income, net profit or earnings after tax) is the money left after all expenses and taxes are deducted from all revenues and gains. In the example income statement, it is $922,251.

Does EBITDA include salaries?

Yes, EBITDA includes salaries. These may be found in both cost of goods sold/cost of sales and among operating expenses.

What is adjusted EBITDA?

Bankers, valuators and others sometimes modify the EBITDA formula to arrive at an adjusted EBITDA (also known as normalized EBITDA). A variety of adjusted EBITDA formulas exist depending on the use.

The main objective is to adjust for one-time and extraordinary items not connected to the core operating profit of the business, such as:

• nonrecurring income or expenses
• non-cash losses
• legal fees and settlements
• insurance claims
• non-market rent
• extraordinary items

What is the negative side of EBITDA?

EBITDA can sometimes paint a misleading picture of a company’s profitability. For example, a business that invests heavily in capital assets or intellectual property may have a positive EBITDA without being profitable.

“Because EBITDA adds back interest, amortization and depreciation, a company may have no net profit but high EBITDA,” Cao says. “It’s important to look at EBITDA alongside other indicators to get a true idea of a company’s financial health.”

Next step

Forecast your business’s cash inflows and outflows by downloading BDC’s free cash flow calculator.

Related definitions

Direct costs

Direct costs are the expenses a business incurs that can be directly tied to the production of a good or the provision of a service. Read more

Indirect costs

Indirect costs are the expenses a business incurs that are not directly related to making a product or service. Read more

Income statement

An income statement shows what your company earns, what it spends and whether it makes a profit over a specific period of time. It’s a fundamental financial document for your business. Read more

Net profit margin ratio

The net profit margin ratio is the percentage of revenue remaining as profit after all expenses, including interest and taxes, are paid. It is calculated by calculated by dividing a company’s net income (earnings after taxes) by its net revenue and multiplying by 100%. Read more

Return on common equity ratio

he return on common equity ratio measures how much profit is generated for each dollar invested by shareholders in common shares, expressed as a percentage. Read more

Return on shareholders’ equity ratio

The return on shareholders' equity ratio measures how much profit is generated for each dollar of equity invested by shareholders, expressed as a percentage. Read more

Cash

Cash refers to the money a business has at its disposal, either on hand or in easily-accessible bank accounts. Read more Didn’t find what you were looking for? Back to glossary