What is EBITDA? Meaning, formula and a worked example

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It strips out those items from earnings to help analyse performance. For US reporting it is a non-GAAP measure, so read the company’s definition and reconciliation rather than assuming every presentation is comparable.

Build the number yourself

Consider a fictional company with £120,000 of net income, £20,000 of interest expense, £30,000 of income tax expense, £25,000 of depreciation and £5,000 of amortisation. Adding those items produces EBITDA of £200,000. The example assumes a simple income statement with no complicating items.

If revenue is £1 million, the company’s EBITDA margin is £200,000 ÷ £1 million = 20%. That does not mean 20% of sales is available to distribute to shareholders.

Why EBITDA is not cash flow

Imagine the same company spends £180,000 replacing equipment and ties up another £40,000 in inventory. Neither outflow is captured by subtracting depreciation in the EBITDA calculation. A business can report a positive EBITDA figure while still needing outside financing. Examine the cash flow statement and debt commitments alongside it.

EBITDA versus adjusted EBITDA

“Adjusted” EBITDA usually removes additional items chosen by the reporting company. Those adjustments may be useful, but their labels are not enough. Ask whether each excluded cost is genuinely unusual, whether similar costs recur, and whether you have applied the same treatment to competitors. Read the reconciliation to the reported accounting measure.

Using EBITDA in valuation

In a simplified comparison, an enterprise value of £2 million divided by annual EBITDA of £200,000 gives a multiple of 10×. Our EV/EBITDA calculator performs that division. It does not establish a fair price: growth, business risk, reinvestment and the quality of earnings still matter.

A useful checking habit

Write down the reporting period and whether your denominator is historical, forecast, reported or adjusted. Do not compare a forecast multiple for one company with a historical multiple for another without making the difference explicit.