EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of operating profitability that excludes financing decisions, tax environment, and non-cash accounting charges. It is used to compare companies and to value businesses (e.g., enterprise value / EBITDA multiples). EBITDA approximates operating cash flow before working capital and capex.

Formula

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

Or, starting from operating income: EBITDA = Operating Income + Depreciation + Amortization. The goal is to isolate core operating performance from capital structure, tax regime, and non-cash charges.

Example

A company reports net income of $100,000, interest expense of $20,000, taxes of $30,000, and depreciation and amortization of $50,000. EBITDA = $100,000 + $20,000 + $30,000 + $50,000 = $200,000.

Use in Valuation

EBITDA multiples (Enterprise Value / EBITDA) are common in M&A and private equity. A business valued at 8× EBITDA with $1M EBITDA has an implied enterprise value of $8M. Multiples vary by industry and growth. EBITDA is also used in covenant calculations for debt agreements.

Relationship to ROI

When evaluating an acquisition or business investment, ROI may be calculated using EBITDA as the return measure—e.g., (EBITDA − Debt Service) / Equity Invested for leveraged buyouts. EBITDA normalizes earnings across different capital structures and tax situations, making it useful for cross-company and cross-deal comparison. See net profit for the bottom-line measure.

Limitations

EBITDA ignores capital expenditures, which are necessary for many businesses. It is not a substitute for cash flow. Companies with high depreciation (e.g., capital-intensive industries) can have positive EBITDA but negative cash flow. EBITDA can also be manipulated through aggressive add-backs. Use alongside net profit and cash flow metrics.