Guide · Business
What Is EBITDA? A Plain-English Guide to Calculating and Using It
EBITDA shows up everywhere from investor decks to loan covenants to business sale listings. Here's what it actually measures, how to calculate it, and where it falls short.
Two Ways to Build EBITDA
You can arrive at EBITDA from either end of the income statement. Starting from net income, add back interest, taxes, depreciation, and amortization. Starting from operating income (EBIT) — which already excludes interest and taxes — you only need to add back depreciation and amortization.
| Line Item | From Net Income | From Operating Income |
|---|---|---|
| Starting point | Net Income: $250,000 | Operating Income: $300,000 |
| + Interest Expense | $20,000 | Already excluded |
| + Taxes | $60,000 | Already excluded |
| + Depreciation | $40,000 | $40,000 |
| + Amortization | $10,000 | $10,000 |
| = EBITDA | $380,000 | $350,000 |
The two methods can give slightly different answers if net income includes other non-operating items (like one-off gains or losses) that don't appear in operating income.
EBITDA Margin: How Efficient Is the Business?
Dividing EBITDA by revenue gives the EBITDA margin — the percentage of each dollar or pound of revenue that converts into operating profit before financing and accounting effects. It's one of the most common ways to compare operating efficiency between companies of different sizes.
Using EBITDA to Estimate Value
EBITDA is also the basis for one of the most common valuation shortcuts: multiply EBITDA by an industry-appropriate multiple to estimate enterprise value. A $380,000 EBITDA business at a 6x multiple implies an enterprise value of $2,280,000 — before adjusting for cash and debt to arrive at what an owner would actually walk away with.
The right multiple depends heavily on growth rate, customer concentration, recurring revenue, and how reliant the business is on any one person — so always benchmark against truly comparable companies rather than a single rule of thumb.
Frequently asked questions
What does EBITDA stand for?
Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a measure of a company's core operating profitability before the effects of financing decisions, tax jurisdiction, and non-cash accounting charges.
Is EBITDA the same as cash flow?
No. EBITDA ignores changes in working capital, capital expenditure, and the actual cash cost of debt repayments — all of which affect real cash flow. A business can have strong EBITDA and still run out of cash if it's spending heavily on equipment or inventory.
Why do investors use EBITDA instead of net income?
EBITDA strips out differences in how companies are financed (debt vs equity), where they're taxed, and how aggressively they depreciate assets — making it easier to compare the underlying operating performance of different businesses.
What's a typical EV/EBITDA multiple?
It varies enormously by industry and growth profile — mature, low-growth businesses might trade at 4–6x EBITDA, while high-growth software companies can trade at 15x or more. Always compare against similar companies in the same sector.