EBITDA (earnings before interest, taxes, depreciation and amortisation)
Learn what EBITDA means, how to calculate it with a euro example, and how lenders and buyers use it.
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Earnings before interest, taxes, depreciation and amortisation (EBITDA) measures the profit your core trading earns. It adds back four items: interest, tax, depreciation and amortisation.
- You can calculate EBITDA from net profit or from operating profit. Both methods give the same figure, so one checks the other.
- Lenders use EBITDA to set borrowing limits, and buyers use it to value businesses. Adjusted EBITDA removes one-off items to show normal trading.
- EBITDA is a useful health check with clear limits. Read it alongside net profit and cash flow, because it ignores the cost of replacing assets.
What does EBITDA stand for?
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It measures the profit your business makes from day-to-day trading, before financing costs and non-cash accounting charges.
The Corporate Finance Institute (CFI) describes EBITDA as a measure of core operating results, which makes it a handy lens on profitability. Think of it as the profit your trading earns before your bank and the Revenue Commissioners take their share. Each part of the name tells you what to add back:
- Earnings means the profit your business makes
- Before interest means you add back what you pay on loans and overdrafts
- Taxes means you add back your corporation tax charge
- Depreciation means you add back the wear-and-tear charge on physical assets, such as vans or machinery
- Amortisation means you add back the equivalent charge on intangible assets, such as software licences or patents
Why EBITDA matters
EBITDA gives you and your bank a like-for-like view of how well your core business trades. That makes it especially useful when you’re:
- valuing your business, because buyers often base their offer on a multiple of EBITDA
- applying for a loan, because lenders often set debt covenants using EBITDA ratios when you’re financing your business
- comparing businesses, because it removes differences in how each one is funded and taxed
- tracking operational efficiency, because it shows whether your core trading earns more each year
Sales growth alone doesn’t tell you whether your operations are becoming more efficient. EBITDA helps fill that gap by showing what your core trading activity earns before loan costs, tax and asset write-downs.
How to calculate EBITDA
You calculate EBITDA by adding interest, taxes, depreciation and amortisation back to profit. Most of these figures sit on your profit and loss statement.
Depreciation and amortisation may also appear in the notes to your year-end accounts or in your fixed asset register. Once you have the figures, follow these steps:
- Find your net profit, the bottom line of your profit and loss statement
- Add back the interest you paid on loans and overdrafts
- Add back your corporation tax charge
- Add back depreciation and amortisation for the period
Written as a formula, this net profit method is:
EBITDA = net profit + interest + taxes + depreciation + amortisation
You can also start from operating profit, which comes before interest and tax are deducted. This shorter route is:
EBITDA = operating profit + depreciation + amortisation
Both formulas give the same answer, so you can use one to check the other.
EBITDA calculation example
Say you run a joinery company in Cork with €250,000 in revenue for the year. Your year-end figures show:
- operating profit of €60,000
- interest paid of €4,000
- profit before tax of €56,000
- corporation tax of €7,000, which is 12.5% of €56,000 at the Irish trading income rate
- net profit of €49,000
- depreciation of €6,000
- amortisation of €2,000
Non-trading income, such as rent, is taxed at 25% instead. Using the net profit formula:
EBITDA = €49,000 + €4,000 + €7,000 + €6,000 + €2,000 = €68,000
Now cross-check it with the operating profit formula:
EBITDA = €60,000 + €6,000 + €2,000 = €68,000
Both routes give €68,000, so your figures are consistent.
What is adjusted EBITDA?
Adjusted EBITDA is EBITDA with one-off or unusual items removed, so it reflects a normal trading year. It matters most when you sell your business, because buyers want to see earnings they can expect to continue.
CFI’s guide lists common adjustments for private companies, including:
- owner pay above the market rate for the role
- legal costs from a one-off dispute
- one-time gains or losses, such as selling a property
- asset write-downs that won’t recur
For example, if you pay yourself €20,000 more than a manager would cost, a buyer may add that €20,000 back. Keep clear records for each adjustment, because buyers and lenders will want to see how you reached your figure.
How EBITDA is used to value a business
Buyers and advisors often value a business by multiplying its EBITDA by a figure called an EBITDA multiple. Multiples vary widely between sectors and change with market conditions, so each business needs its own.
The EV/EBITDA ratio compares enterprise value (EV), the value of the whole business including debt, with EBITDA. It’s commonly used to compare the relative value of different businesses.
Purely to show the maths, a multiple of 5 applied to the €68,000 example gives an enterprise value of €340,000. An advisor can help you find a realistic multiple for businesses like yours.
CFI points out that EV/EBITDA ignores capital expenditure and may not reflect cash flow. Use it alongside the other methods in this guide to valuing a business.
EBITDA vs net profit
Net profit is what’s left after every cost, including interest, tax, depreciation and amortisation. EBITDA adds those four items back, so it’s usually the higher figure.
In the example, net profit is €49,000 and EBITDA is €68,000. The €19,000 gap is made up of €4,000 interest, €7,000 tax, €6,000 depreciation and €2,000 amortisation.
Net profit shows what you keep for the year. EBITDA shows how strongly your operations perform before funding and asset costs, so use both when you review your results.
EBITDA vs EBIT
EBIT stands for earnings before interest and taxes. It deducts depreciation and amortisation, while EBITDA adds them back.
EBIT suits businesses with heavy equipment, because it counts the wear on assets you’ll eventually replace. In the example, EBIT is €60,000, the same as operating profit, while EBITDA is €68,000.
You may also see earnings before interest, taxes and amortisation (EBITA), which keeps depreciation as a cost.
EBITDA vs cash flow
EBITDA gives a rough guide to operating cash flow, while the cash in your bank can tell a different story. AccountingTools’ EBITDA definition describes it as an approximation of results on a cash basis.
The difference comes from items that EBITDA leaves out, such as:
- changes in working capital, like customers paying late or stock building up
- capital expenditure on new equipment or vehicles
- tax you pay in cash
- interest you pay on loans
Picture a business with €68,000 EBITDA whose biggest customer pays 90 days late. Its bank balance can still run low, which is why you track cash flow separately.
What is EBITDA margin?
EBITDA margin shows EBITDA as a percentage of revenue. It tells you how much operating profit you make from every euro of sales.
EBITDA margin = EBITDA ÷ revenue × 100
In the example, €68,000 ÷ €250,000 × 100 = 27.2%. The business earns 27.2c of EBITDA from every euro of revenue.
A percentage lets you compare years and businesses of different sizes, and it sits well alongside your other profit margins. For reference, NYU Stern’s January 2026 data on US publicly traded companies shows an average EBITDA margin of 16.56%. Margins range from 10.11% in general retail to 35.93% in software.
Irish small business margins may differ, so compare your figure with businesses in your own sector and with your own past results.
What EBITDA doesn’t tell you
EBITDA leaves out real costs, so it can make a business look healthier than it is. Its main limits are that EBITDA:
- ignores capital expenditure, the cash you spend replacing equipment and vehicles
- excludes debt costs, so a heavily borrowed business can show the same EBITDA as a debt-free one
- lacks a standard definition in financial reporting rules, so check what’s included before comparing figures
- can flatter results when costs are added back without good reason
The European Securities and Markets Authority (ESMA) confirmed in February 2026 that IFRS 18, a new International Financial Reporting Standard, doesn’t define EBITDA. Treat any EBITDA figure as a management calculation rather than an audited statutory number.
Warren Buffett is a long-standing critic of the measure. In his 2000 Berkshire Hathaway shareholder letter, he asked: “does management think the tooth fairy pays for capital expenditures?”
Track your EBITDA with Xero
Tracking EBITDA regularly means you walk into lender and buyer meetings with figures you can explain. Xero brings your accounting data into easy-to-read profit and loss reports, so the numbers behind your EBITDA are always to hand.
Automated bank feeds keep your books up to date, and you can work with your accountant in real time. See how it works for your business and get one month free.
FAQs on EBITDA
These answers cover questions small business owners often ask about EBITDA.
What is a good EBITDA for a small business?
A good EBITDA grows year on year and comfortably covers your loan repayments and equipment replacement. The trend over several years tells you more than any single figure.
Is EBITDA the same as gross profit?
No, gross profit is revenue minus cost of goods sold. EBITDA also deducts operating expenses such as wages and rent, so it’s usually lower.
Is EBITDA revenue or profit?
EBITDA is a profit measure. It starts with revenue, deducts cost of sales and operating expenses, and stops before interest, tax, depreciation and amortisation.
Can EBITDA be negative?
Yes, when your operating costs are higher than your gross profit. It’s a signal to review pricing and costs quickly, because your core trading is losing money before any loan or tax costs.
What is the debt-to-EBITDA ratio?
It divides your total debt by your EBITDA to show how heavily you’ve borrowed against your earnings. CFI’s rule of thumb treats a net debt-to-EBITDA ratio under 3 as acceptable, over 4 as high and over 6 as elevated.
Is EBITDA used in Ireland?
Yes, Irish accountants value SMEs using EBITDA as a starting point. EBITDA is an alternative performance measure rather than a figure set by accounting standards, so ask your accountant how it’s calculated.
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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.