What is EBITDA?

EBITDA (definition)

EBITDA is a measure of profitability that excludes the costs of financing, taxation, and asset aging.

EBITDA stands for earnings before interest, taxation, depreciation and amortization.

  • Earnings: Money your business makes
  • Interest: The cost of borrowing money
  • Taxation: Money owed to the government
  • Depreciation: Accounting for tangible (physical) assets that lose value over time
  • Amortization: Similar to depreciation, but for intangible assets (such as patents)

EBITDA gives you a clear view of the income (your earnings) from your business’s operations by excluding the costs generated by other areas of the business: interest on loans, taxation depreciation and amortization.

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EBITDA vs net profit

There’s often confusion between EBITDA and net profit. Net profit measures all revenues minus all expenses to give you a "final" view of your overall profitability. So while your net profit figure takes account of interest, taxation, depreciation and amortization, EBITDA deliberately excludes these items to focus on income. As a result, EBITDA is a bigger number than net profit.

Why EBITDA matters

EBITDA is a straightforward measure of your company’s core profitability and operational efficiency. This helps you understand your business’s performance on these measures without worrying about accounting complexities, and helps investors compare a business’s performance and growth potential against others.

How to calculate EBITDA

Net profit + Interest + Taxation + Depreciation + Amortization = EBITDA

Here are the equation’s components:

  • Net profit is the total earnings/revenues minus all expenses
  • Interest is the cost paid on debt, like bank loans
  • Taxation is the income tax paid to the government
  • Depreciation and amortization are expenses that account for the gradual aging and loss of value of tangible assets like equipment, vehicles, and buildings (which you depreciate), and intangible assets like patents or trademarks (which you amortize)

You’ll find net profit, interest, taxation, depreciation, and amortization on your income statement.

You can also calculate EBITDA in another way, such as by starting with operating profit and simply adding depreciation/amortization back in.

Example EBITDA calculation

A company’s income statement shows net profit: $300,000, interest of $50,000, taxation of $100,000, depreciation of $80,000 and amortization of $20,000.

EBITDA = $300,000 + $50,000 + $100,000 + $80,000 + $20,000 = $550,000

What EBITDA doesn’t tell you

Since EBITDA focuses only on the operational side of the business, it leaves out information about tax rates, interest expenses, and significant intangible assets.

  • It doesn’t tell you how much debt a business is carrying.
  • EBITDA doesn’t account for capital expenditures, which are crucial for success.
  • EBITDA is not a standardized metric and can be reported in different ways. This can make it harder to get a true picture of a company’s profitability compared with other measures.

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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.