What is EBITDA?
EBITDA, earnings before interest, tax, depreciation and amortisation, measures the profit a business makes from its operations before financing, tax and non-cash charges.
What EBITDA means
EBITDA takes net profit and adds back four costs: interest, tax, depreciation and amortisation. The idea is to show how much the core business earns, without the effect of how it is financed, where it pays tax, or how its assets are written down.
The formula is:
EBITDA = net profit + interest + tax + depreciation + amortisation
It can also be worked out from operating profit by adding back depreciation and amortisation.
Example
A London café company's profit and loss account shows:
| Line | Amount |
|---|---|
| Net profit after tax | £48,600 |
| Corporation Tax | £11,400 |
| Loan interest | £4,000 |
| Depreciation of kitchen equipment | £9,000 |
| Amortisation of the lease premium | £2,000 |
| EBITDA | £75,000 |
Why it matters for your business
EBITDA is the number buyers, investors and lenders often ask for. Small businesses are frequently valued at a multiple of EBITDA (for example, three to five times for many owner-managed companies, depending on the sector and how dependent the business is on its owner). Banks use it to test whether a business can service its debts.
For owner-managed companies, buyers usually look at adjusted EBITDA, which adds back one-off costs and adjusts the owner's pay to a market salary. A director taking a £12,570 salary plus dividends makes EBITDA look higher than a buyer would accept, because they will need to pay a manager properly.
What EBITDA leaves out
EBITDA is not cash. It ignores the money spent replacing equipment, changes in working capital, loan repayments and tax bills. A business with strong EBITDA can still run out of money. Read it alongside a cash flow forecast.
EBITDA vs EBIT
EBIT keeps depreciation and amortisation as costs. For businesses with heavy equipment, EBIT is the more conservative and often more honest figure.
How to calculate it from your accounts
Start with profit before tax from your profit and loss account. Add back loan and overdraft interest. Then add back the depreciation and amortisation charges, which appear in the notes to the accounts or in your fixed asset register. If you are preparing figures for a sale, list any one-off items, such as a legal dispute or a relocation, separately so a buyer can see what they would add back.
Common questions
No. EBITDA ignores capital spending, loan repayments, tax payments and changes in stock, debtors and creditors. Operating cash flow can be well above or below EBITDA, so lenders usually look at both. Many banks also check that debt is not too large a multiple of EBITDA.
It depends on the sector. Professional services firms often run at 15% to 30% of revenue, while hospitality and retail are commonly 5% to 15%. Compare with businesses like yours rather than a single benchmark.