A profit measure that strips out the impact of financing decisions, tax decisions, and non-cash accounting expenses so businesses can be compared on operating performance alone. The standard metric in business valuation.
EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization. Calculated by adding interest, taxes, depreciation, and amortization back to net profit (or equivalently, starting with operating profit and adding back depreciation and amortization).
How to calculate it
EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization
Or equivalently: Operating profit + Depreciation + Amortization.
Common uses
- Business valuation - small businesses typically sell for 3-6x EBITDA, higher for software and faster-growing categories
- Investor and lender conversations - EBITDA is the standard profit measure they ask for
- Comparing competitors - strips out financing and accounting differences
Watch out
EBITDA is not cash flow. The business still pays interest, taxes, and capital expenses - EBITDA just doesn't subtract them. Don't treat EBITDA as money in the bank.
For the full explanation, see EBITDA Explained.