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EBITDA

General

Earnings Before Interest, Taxes, Depreciation and Amortisation

A measure of a company's core operating profitability before accounting for financing costs, tax obligations, and non-cash charges like depreciation and amortisation.

Definition

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is a measure of a company's core operating profitability — how much money the business earns from its operations before accounting for financing costs, tax obligations, and non-cash accounting adjustments.

EBITDA is widely used by analysts, investors, and private equity firms to evaluate and compare the operational performance of companies, independent of their capital structure, tax position, or accounting choices around asset depreciation.

It is important to note that EBITDA is not a GAAP (Generally Accepted Accounting Principles) metric — it is not reported on standard financial statements and must be calculated from the income statement.

Formula

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation

Equivalently: EBITDA = Operating Profit (EBIT) + Depreciation + Amortisation

Or derived directly from revenue: EBITDA = Revenue − Cost of Goods Sold − Operating Expenses (before D&A)

Worked Example

A mid-size Indian manufacturer reports (₹ in crore):

  • Revenue: ₹500
  • Cost of Goods Sold: ₹280
  • Operating Expenses: ₹80
  • Depreciation: ₹30
  • Interest: ₹25
  • Tax: ₹20
  • Net Profit: ₹65

EBITDA = ₹65 + ₹25 + ₹20 + ₹30 = ₹140 crore

EBITDA Margin = ₹140 / ₹500 × 100 = 28%

This means 28 paise of every rupee of revenue is converted into operating profit before non-cash charges and financing costs. For context, if a comparable competitor has an EBITDA margin of 22%, this company is more operationally efficient.

Key Things to Know

  • EBITDA ≠ cash flow: EBITDA does not equal operating cash flow because it does not account for changes in working capital (receivables, inventory, payables). A company can have high EBITDA and negative operating cash flow if it is building up receivables.
  • Capex-heavy businesses: For industries like telecom, airlines, or manufacturing that require heavy capital expenditure, EBITDA can be significantly higher than free cash flow (FCF). Always examine EBITDA alongside capex when analysing such businesses.
  • Amortisation component: The 'A' in EBITDA refers to amortisation of intangible assets (like goodwill, patents, customer lists). This is separate from loan amortisation. Both are non-cash charges added back in EBITDA.
  • Adjusted EBITDA: Companies often report "Adjusted EBITDA" by further removing one-time items (restructuring costs, litigation settlements, ESOP expenses). Be cautious — frequent "one-time" adjustments may signal ongoing issues.
  • Valuation using EBITDA: Private equity and investment bankers typically value businesses at 6–12× EBITDA (the multiple depends on the sector, growth rate, and competitive position). Knowing a company's EBITDA and the sector multiple gives a rough enterprise value estimate.

Related Terms

ROIReturn on InvestmentAmortisationLoan AmortisationIRRInternal Rate of Return
Frequently Asked Questions
Why is EBITDA used instead of net profit?
EBITDA removes the effects of financing decisions (interest), tax jurisdiction differences, and accounting policies around depreciation. This makes it easier to compare the operating performance of two companies with different capital structures, tax rates, or asset-heavy vs asset-light models.
What is a good EBITDA margin?
EBITDA margin = EBITDA / Revenue × 100. A 'good' margin is highly industry-specific. Software and IT companies often achieve 25–40% EBITDA margins. Retail businesses may achieve 5–10%. Manufacturing companies typically fall in the 10–20% range. Compare within the same industry.
Is EBITDA the same as operating profit?
Not exactly. Operating profit (EBIT) = Revenue − COGS − Operating Expenses. It includes depreciation and amortisation as expenses. EBITDA adds back depreciation and amortisation to EBIT, making EBITDA always equal to or greater than EBIT.
What are the limitations of EBITDA?
EBITDA ignores capital expenditure requirements, changes in working capital, debt servicing obligations, and actual cash tax payments. Warren Buffett famously called EBITDA 'misleading earnings' because companies with heavy capex or debt can look financially healthy on EBITDA while being cash-flow negative.
What is EV/EBITDA?
Enterprise Value to EBITDA (EV/EBITDA) is a common valuation multiple. It compares a company's total enterprise value (market cap + debt − cash) to its EBITDA. A lower EV/EBITDA suggests a cheaper valuation. Indian listed companies in mature sectors typically trade at 8–15× EBITDA; high-growth tech companies can trade at 30–50×.