EBITDA
Learn what EBITDA means, how to calculate it, the EBITDA margin, and when to use it for your business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Calculate EBITDA by adding interest, taxes, depreciation, and amortization back to your net profit. It shows your core operating profitability before financing and accounting effects.
- EBITDA margin (EBITDA divided by revenue) turns the figure into a percentage, so you can compare profitability against competitors and industry benchmarks.
- EBITDA isn’t recognized under IFRS or GAAP and doesn’t appear on your income statement, so pair it with net profit, cash flow, and debt ratios.
- Use EBITDA when applying for loans, seeking investors, or preparing for a sale, since it standardizes performance across different capital structures.
EBITDA (definition)
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It measures your business’s operating profitability by leaving out financing costs, tax, and the accounting treatment of assets as they lose value.
Here’s what each part means:
- Earnings: the net income your business generates from operations
- Interest: the cost of borrowing money through loans or credit
- Taxes: the income tax your business owes
- Depreciation: the gradual expense of physical assets like equipment and vehicles
- Amortization: the gradual expense of intangible assets like patents and trademarks
Why EBITDA matters
EBITDA matters because it shows your core operating profitability without accounting complexities getting in the way. It gives lenders and investors a clean view of how your business performs day to day.
This metric helps you:
- assess how well your business generates profit from daily operations
- compare performance against competitors with different financing structures
- show growth potential to investors and lenders
Investors and lenders often ask for EBITDA because it gives a standardized view of operational health across businesses.
How to calculate EBITDA
Calculate EBITDA by adding interest, taxes, depreciation, and amortization back to your net profit. You’ll find each figure on your income statement.
The formula is: net profit + interest + taxes + depreciation + amortization = EBITDA.
You can also start from operating profit: operating profit + depreciation + amortization = EBITDA. This method works well if your accounting software shows operating profit separately.
Two details keep the figure accurate. Add back only the interest on debt and only income tax, not other taxes. EBITDA isn’t shown on your income statement, and it isn’t a measure recognized under IFRS or GAAP.
Example EBITDA calculation
A worked example shows how the formula applies to your own numbers. Here’s how a small business might calculate EBITDA from its income statement:
- Net profit: $300,000
- Interest: $50,000
- Taxes: $100,000
- Depreciation: $80,000
- Amortization: $20,000
Add these together: $300,000 + $50,000 + $100,000 + $80,000 + $20,000 = $550,000. This business has an EBITDA of $550,000, its operating earnings before financing and accounting costs.
What is EBITDA margin
EBITDA margin turns your EBITDA into a percentage of revenue, so you can compare profitability no matter the size of the business. Work it out by dividing EBITDA by revenue.
The formula is: EBITDA divided by revenue = EBITDA margin.
Using the earlier example, an EBITDA of $550,000 on revenue of $2,000,000 gives a 27.5% EBITDA margin. A higher margin means more of each dollar of revenue becomes operating profit.
When to use EBITDA
EBITDA is most useful when you need to show your business’s earning potential to people outside the business. It earns its keep in a few situations:
- Applying for a business loan: lenders use EBITDA to assess your ability to service debt.
- Seeking investors: investors compare EBITDA across businesses to weigh opportunities.
- Preparing for a sale:business valuations often use EBITDA multiples to set a price.
- Benchmarking performance: compare your operations against competitors with different capital structures.
For everyday decisions like tax planning or cash flow management, net profit or your cash flow statement is often more useful. EBITDA works best as a comparison and valuation tool.
EBITDA vs net profit
EBITDA and net profit both measure profitability, but they count different costs. Knowing the difference helps you pick the right metric for the job.
- Net profit: subtracts all expenses from revenue, including interest, taxes, depreciation, and amortization, to show what’s left after all obligations.
- EBITDA: leaves out those items to show only your operating earnings.
Because EBITDA leaves out more costs, it’s usually a larger number than net profit. Use net profit to see your bottom line after all expenses and taxes. Use EBITDA to judge core operating performance.
What EBITDA doesn’t tell you
EBITDA is useful, but it leaves out several factors that matter to your financial health. Keep these limits in mind before you rely on it:
- Hides debt levels: it doesn’t show how much you owe or whether you can repay loans.
- Ignores capital spending: equipment purchases and major investments don’t appear in the figure.
- Lacks standardization: businesses can calculate EBITDA differently, which makes direct comparisons tricky.
Lenders often use the debt-to-EBITDA ratio to judge whether your business can repay what it borrows. For a full picture, combine EBITDA with other measures like net profit, cash flow, and debt-to-equity ratios.
Track your EBITDA with Xero
Once you understand EBITDA, tracking it regularly helps you show your business’s value to lenders and investors with confidence.
Xero’s online accounting software pulls together the income statement figures you need to calculate EBITDA. With real-time reporting and clear financial dashboards, you can track profitability without the manual work, so try Xero and get one month free.
FAQs on EBITDA
Here are answers to some frequently asked questions about EBITDA and how it applies to your business.
What does your EBITDA tell you?
It tells you how much profit your business makes from core operations before interest, taxes, and accounting adjustments. A higher EBITDA generally points to stronger operational performance.
Does EBITDA include owner salary?
Yes, EBITDA usually includes owner salary as an operating expense. When valuing a small business for sale, buyers may use seller’s discretionary earnings (SDE) instead, which adds the owner’s salary back in.
What is a good EBITDA margin?
A good EBITDA margin varies by industry, so compare yours against sector benchmarks rather than a universal target. A margin that rises over time usually signals improving operational efficiency.
When should I use EBITDA instead of net profit?
Use EBITDA when comparing businesses with different capital structures or presenting to investors and lenders. Use net profit for tax planning and understanding your actual bottom line after all costs.
Is EBITDA recognized under IFRS or GAAP?
No, EBITDA isn’t recognized under IFRS or GAAP and doesn’t appear on your income statement. Treat it as a supplementary measure alongside standardized figures like net profit.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.