What Is EBITDA? Simple Explanation and How to Calculate It
EBITDA shows up a lot in company reports and news. Here's what's behind the acronym and why you shouldn't trust it blindly.
What it is
EBITDA is earnings before interest on debt, taxes, depreciation and amortization. It's calculated like this:
EBITDA = operating profit + depreciation and amortization
The idea is to show how much the business itself earns, without the effect of debt, taxes and accounting write-offs. This makes it easier to compare companies from different countries.
Where it's used
| Metric | What it shows |
|---|---|
| EV/EBITDA | How many years of operating profit the company is worth, including its debt |
| Debt / EBITDA | How many years it would take the company to pay off its debt |
| EBITDA margin | EBITDA as a share of revenue |
Limitations
- EBITDA ignores spending on replacing equipment — for factories, that's a lot of money.
- It isn't actual cash: also look at cash flow.
- Companies sometimes calculate “adjusted” EBITDA in their own way.
How to read a full report — in the financial statements lesson and the article how to read a company's financial statements.
Aspiro Invest — a medium-term portfolio: what to hold, when to review it and where the protective levels are.
- EBITDA is earnings before interest, taxes, depreciation and amortization.
- Handy for comparisons and assessing debt.
- It's not the same as cash — look at cash flow too.
Frequently asked questions
Why is EBITDA bigger than net income?
Because interest, taxes, depreciation and amortization haven't been subtracted. Net income is what's left after all expenses.
What debt/EBITDA level is normal?
It depends on the industry. The higher the number, the heavier the debt load; compare with similar companies.
Can EBITDA be negative?
Yes, if the business loses money even before interest and taxes. That's a serious warning sign.
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