What is EBITDA?

Published Monday 22 June 2026

Table of contents

• What does EBITDA stand for?
• Why EBITDA matters
• How to calculate EBITDA
• EBITDA calculation example
• EBITDA vs net profit
• EBITDA vs EBIT
• What is EBITDA margin?
• What EBITDA doesn't tell you
• Track your EBITDA with Xero
• FAQs on EBITDA

Key takeaways

• EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It measures how profitable your business is from day-to-day operations, without the influence of financing decisions, tax structures or asset write-downs.
• You can calculate EBITDA using 2 formulas: start from net profit and add back interest, taxes, depreciation and amortisation, or start from operating profit and add back depreciation and amortisation.
• EBITDA is widely used in business valuations, loan applications and investor comparisons because it makes it easier to compare businesses on a level playing field.
• While EBITDA is a useful profitability metric, it doesn't account for capital expenditure, debt levels or cash flow, so it should always be used alongside other financial measures.

What does EBITDA stand for?

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It's a financial metric that measures your business's core profitability by stripping out costs that relate to financing, tax and asset depreciation.

By removing these items, EBITDA gives you a clearer picture of your operational profitability. Here's what each component means:

• Earnings: your business's net profit, also known as the bottom line on your profit and loss statement
• Before interest: excludes interest payments on loans, overdrafts or other borrowing
• Taxes: excludes corporation tax and other income taxes your business pays
• Depreciation: excludes the gradual reduction in value of physical assets like vehicles, equipment and machinery. Learn more about depreciation
• Amortisation: excludes the gradual reduction in value of intangible assets like patents, trademarks and software licences. Learn more about amortisation

Because EBITDA strips out these non-operational costs, it's especially useful when you want to understand how well your business performs at its core, regardless of how it's financed or taxed.

Why EBITDA matters

EBITDA matters because it gives you a consistent way to measure your business's operational performance. Whether you're seeking a loan, attracting investors or simply trying to understand how efficiently your business runs, EBITDA helps you cut through the noise.

For small businesses, EBITDA is particularly useful in these situations:

• Business valuations: buyers and investors often use EBITDA multiples to estimate what a business is worth, making it a key figure if you're considering selling. See Xero's guide on how to value a business
• Loan applications: lenders use EBITDA to assess whether your business generates enough income to cover debt repayments
• Comparing businesses: because EBITDA removes the effects of different tax regimes, financing structures and depreciation policies, it makes it easier to compare businesses on a like-for-like basis
• Assessing operational efficiency: tracking your EBITDA over time helps you spot whether your core operations are becoming more or less profitable

That context matters right now: UK small businesses tracked by Xero Small Business Insights saw sales grow +4.7% year-on-year across 2025, yet as Xero UK MD Kate Hayward noted in early 2026, "margins are squeezed by energy and finance costs." Sales growth alone doesn't tell you whether your operations are genuinely becoming more efficient. That's precisely the gap EBITDA is designed to fill.

Even if you're not planning to sell or raise funding, knowing your EBITDA gives you a solid benchmark for how your business is performing at an operational level.

How to calculate EBITDA

You can calculate EBITDA using 2 straightforward formulas. Both use figures you'll find on your profit and loss statement.

Formula 1: starting from net profit

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

This approach starts with your bottom line and adds back the 4 items that EBITDA excludes. You'll find net profit at the bottom of your profit and loss report, interest in your finance costs, and depreciation and amortisation in your operating expenses.

Formula 2: starting from operating profit

EBITDA = Operating profit + Depreciation + Amortisation

This formula is often quicker because operating profit already excludes interest and taxes. You only need to add back depreciation and amortisation. Operating profit appears partway down your profit and loss statement, after cost of sales and operating expenses but before interest and tax.

EBITDA calculation example

Here's a worked example using formula 1. Imagine your profit and loss statement shows the following figures for the year:

• Net profit: £45,000
• Interest paid: £3,000
• Taxes: £9,000
• Depreciation: £6,000
• Amortisation: £2,000

Applying the formula:

EBITDA = £45,000 + £3,000 + £9,000 + £6,000 + £2,000 = £65,000

This means your business generated £65,000 from its core operations during the year, before accounting for how it's financed, taxed or how its assets lose value over time.

You can check this against formula 2. If your operating profit was £57,000 (that is, net profit plus interest plus taxes: £45,000 + £3,000 + £9,000), then:

EBITDA = £57,000 + £6,000 + £2,000 = £65,000

EBITDA vs net profit

The key difference between EBITDA and net profit is what gets deducted. Net profit is your bottom line after all costs are taken out, including interest, taxes, depreciation and amortisation. EBITDA adds those 4 items back in.

This means EBITDA is always a higher figure than net profit. In the example above, the business had a net profit of £45,000 but an EBITDA of £65,000.

Net profit tells you what's left after every expense. EBITDA tells you how much your operations generate before financing, tax and asset-related costs come into play. Both are useful; they simply answer different questions about your business's financial health.

EBITDA vs EBIT

EBIT stands for earnings before interest and taxes. It's similar to EBITDA but doesn't add back depreciation and amortisation, meaning EBIT includes those costs.

The practical difference: EBIT reflects the cost of using up physical and intangible assets over time, while EBITDA removes those charges entirely. This makes EBITDA more useful when comparing businesses with very different asset bases, such as a software company versus a manufacturing firm.

EBIT, on the other hand, can be more informative for asset-heavy businesses where depreciation represents a real, ongoing cost. If your business relies on expensive equipment that needs regular replacement, EBIT may give you a more realistic view of profitability than EBITDA.

What is EBITDA margin?

EBITDA margin shows your EBITDA as a percentage of total revenue. It tells you how much of every pound your business earns is converted into operational profit.

The formula is:

EBITDA margin = (EBITDA / Total revenue) x 100

For example, if your EBITDA is £65,000 and your total revenue is £250,000, your EBITDA margin is 26%. This means for every £1 of revenue, your business keeps 26p in operational profit.

What counts as a healthy EBITDA margin varies by industry. As a general guide, an EBITDA margin above 10% is considered positive, while margins above 20% suggest strong operational efficiency. Comparing your margin to other businesses in your sector gives you a more meaningful benchmark than looking at the percentage in isolation.

What EBITDA doesn't tell you

EBITDA is a useful metric, but it has real limitations. It's worth understanding what it leaves out so you don't rely on it as your only measure of financial health.

Here are the main gaps to be aware of:

• It ignores capital expenditure. EBITDA doesn't account for spending on equipment, vehicles or property. A business with a high EBITDA but heavy capital costs may have far less cash available than the figure suggests.
• It doesn't reflect debt levels. Because interest payments are stripped out, 2 businesses with the same EBITDA could have very different debt burdens. This matters when assessing financial risk.
• It's not a standardised metric. Unlike net profit, EBITDA isn't defined by any accounting standard. Different businesses may calculate it slightly differently, which can make comparisons less reliable.
• It can be used to overstate performance. Because EBITDA excludes several real costs, it can paint an overly optimistic picture. Warren Buffett has famously criticised EBITDA, arguing that depreciation is a very real expense that shouldn't be ignored.

EBITDA works best when you use it alongside other metrics like net profit, cash flow and debt-to-equity ratios to build a complete picture of your business's finances. For a broader view, explore how financial reporting ties these metrics together.

Track your EBITDA with Xero

Calculating EBITDA starts with having accurate, up-to-date financial data. Xero accounting software gives you up-to-date profit and loss reports, so you can quickly find the figures you need: net profit, interest, taxes, depreciation and amortisation.

With your finances organised in one place, you can track your EBITDA over time, spot trends in your operational profitability and make confident decisions about the future of your business. Get one month free.

FAQs on EBITDA

Here are answers to frequently asked questions about EBITDA.

What is a good EBITDA for a small business?

There's no single "good" EBITDA figure because it depends on your industry, business size and growth stage. Focus on your EBITDA margin and how it trends over time rather than comparing raw numbers.

Is EBITDA the same as gross profit?

No. Gross profit is revenue minus cost of goods sold, while EBITDA also deducts operating expenses before adding back interest, taxes, depreciation and amortisation. EBITDA gives a broader view of operational profitability.

Can EBITDA be negative?

Yes. A negative EBITDA means your business's core operations are losing money before interest, taxes, depreciation and amortisation are considered. This can happen in early-stage businesses or during periods of rapid investment.

What is the debt-to-EBITDA ratio?

The debt-to-EBITDA ratio measures how many years it would take your business to pay off its debt using EBITDA alone. Lenders often use this ratio when assessing loan applications; a lower ratio signals stronger financial health.

Is EBITDA used in the UK?

Yes. EBITDA is widely used in the UK for business valuations, mergers and acquisitions, and loan assessments. While it isn't defined by UK accounting standards, it's a common metric in financial reporting and investor discussions.