EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s a measure of a company’s core operating profitability, stripping out financing costs, tax obligations, and non-cash accounting charges to show how much profit the underlying business operations generate.
You’ll encounter EBITDA most often when a business is being bought or sold, when seeking investment, or when comparing financial performance across businesses. Lenders and investors often use it as a proxy for ‘operational cash generation’.
What Does the Acronym mean?
- Earnings, your operating profit before adjustments
- Before Interest, adds back interest paid on loans (reflects financing decisions, not operational performance)
- Before Taxes, adds back corporation tax (varies by jurisdiction, not a reflection of the business itself)
- Before Depreciation, adds back the annual write-down of physical assets like equipment and vehicles
- Before Amortisation, adds back the annual write-down of intangible assets like patents or goodwill
| 📊 Example A manufacturing company has: • Revenue: £800,000 • Operating costs: £560,000 • Operating profit: £240,000 • Interest on loans: £18,000 • Corporation tax: £42,000 • Depreciation on machinery: £35,000 • Amortisation of patents: £12,000 Net profit = £170,000 EBITDA = £170,000 + £18,000 + £42,000 + £35,000 + £12,000 = £277,000 |
Why is EBITDA Used?
EBITDA is particularly useful for:
- Comparing companies, removing tax and financing differences makes businesses easier to compare on a like-for-like basis
- Business valuations, many deals are priced as a multiple of EBITDA (e.g. ‘the business sold for 5x EBITDA’)
- Assessing debt capacity, lenders often look at the ratio of debt to EBITDA to gauge how much a business can reasonably borrow
- Tracking operational progress, useful for seeing whether the core business is improving year-on-year
| EBITDA multiples in UK business sales: In the UK mid-market (businesses valued at £1m–£50m), typical EBITDA multiples range from 4x to 8x, depending on sector, growth rate, and recurring revenue. Higher-growth technology businesses can command 10x or more. |
EBITDA vs Profit: Which Should You Use?
Neither is universally ‘better’, they answer different questions.
- Net profit tells you what the business actually earned after all costs, which matters for tax purposes and for understanding what an owner-manager takes home.
- EBITDA tells you how the core operations perform, which matters when comparing performance over time or against peers.
A business can have a high EBITDA but low net profit if it carries significant debt (high interest payments) or has heavily depreciated assets. This is common in capital-intensive sectors like manufacturing, haulage, and hospitality.
Criticisms of EBITDA
EBITDA has critics. The investor Warren Buffett famously called it a misleading metric because it ignores capital expenditure, the money businesses must spend just to maintain their assets. A company that needs to replace expensive machinery every few years has very different economics from one that doesn’t, yet both might report the same EBITDA.
For small businesses, net profit and cash flow are usually more meaningful measures of day-to-day financial health. EBITDA becomes more relevant as you scale, seek investment, or begin thinking about selling.
Frequently Asked Questions
No. Operating profit (also called EBIT) is earnings before interest and tax, but it still includes depreciation and amortisation. EBITDA goes a step further by adding those back too.
Not routinely. EBITDA is most useful when seeking investment, preparing for a business sale, or applying for significant financing. For day-to-day financial management, gross profit, net profit, and cash flow are more practical metrics.
EBITDA margins vary widely by sector. As a rough guide: retail 5–10%, professional services 20–35%, manufacturing 10–20%, software/SaaS 25–40%. The trend matters as much as the absolute figure.
