finance
EBITDA
Earnings Before Interest, Tax, Depreciation, and Amortization. The standard profitability metric for valuation.
Definition
EBITDA strips out financing structure (interest), tax structure, and non-cash accounting items (depreciation, amortization) to show the underlying operating cash generation. It is the standard metric for comparing companies and for valuation - business sale multiples are almost always quoted as 'X times EBITDA'. For service businesses with little fixed asset base, EBITDA and operating profit are very close. For capital-intensive businesses (manufacturing, transport), they diverge significantly because of depreciation.
In your business
- →Use EBITDA when valuing or selling the business
- →Use operating profit when running the business day-to-day
- →Owner add-backs (your salary, personal expenses run through the business) are recalculated for 'adjusted EBITDA' in a sale