What is EBITDA?

Published Thursday 18 June 2026

Table of contents

• What is EBITDA?
• EBITDA vs net profit
• Why EBITDA matters
• Who uses EBITDA
• How to calculate EBITDA
• EBITDA calculation example
• What is a good EBITDA?
• EBITDA vs EBIT vs EBT
• What EBITDA doesn't tell you
• Adjusted EBITDA
• Track your EBITDA with Xero
• FAQs on EBITDA

Key takeaways

• EBITDA measures your business's operating profitability by stripping out interest, taxes, depreciation, and amortization, giving you a clearer picture of day-to-day performance.
• Investors, lenders, and buyers use EBITDA to compare businesses across industries because it removes variables like tax strategies and financing structures that differ from company to company.
• A healthy EBITDA margin varies by industry, so benchmark yours against similar businesses rather than relying on a single "good" number.
• EBITDA has real limitations: it doesn't account for capital spending, debt obligations, or cash flow, so always use it alongside other financial metrics.

What is EBITDA?

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a measure of your business's core operating profitability. It shows how much money your business generates from its regular operations before accounting for financing decisions, tax obligations, and non-cash expenses. It's one of the most widely used measures of profitability in business.

EBITDA strips out 4 categories that can vary widely between businesses, even when those businesses perform similarly in their day-to-day operations.

• Earnings: your net income, or the revenue left after all expenses
• Interest: the cost of borrowing, such as loan or credit line payments
• Taxes: federal, state, and local income taxes your business pays
• Depreciation: the gradual loss in value of physical assets like equipment, vehicles, or machinery over time
• Amortization: the gradual write-off of intangible assets like patents, trademarks, or software licenses

By removing these items, EBITDA focuses on how well your business operates at its core. It's a useful starting point for understanding profitability, but it shouldn't be the only metric you rely on.

EBITDA vs net profit

EBITDA and net profit both measure profitability, but they tell you different things about your business.

Net profit (also called net income) is the bottom line on your income statement. It's the amount left after deducting every expense, including interest, taxes, depreciation, and amortization. Net profit shows your actual take-home earnings for a given period.

EBITDA, on the other hand, adds those deductions back in. This makes it easier to compare operating performance between businesses that have different debt levels, tax situations, or asset bases. For example, 2 businesses with identical operations could report very different net profits simply because 1 carries more debt. EBITDA levels that playing field.

Use net profit when you need to understand your true bottom-line earnings. Use EBITDA when you want to evaluate how well your core operations perform, separate from financing and accounting decisions.

Why EBITDA matters

EBITDA gives you a standardized way to assess your business's operating health. It matters because it provides a consistent benchmark that isn't skewed by how you've structured your finances.

Here are the most common situations where EBITDA plays a key role.

• Business valuation: buyers often value small businesses as a multiple of EBITDA, making it one of the first numbers they'll look at if you're planning to sell your business
• Attracting investors: potential investors use EBITDA to gauge whether your business generates enough operating profit to justify their investment
• Securing loans: lenders review your EBITDA to assess whether your business can comfortably service debt repayments
• Benchmarking performance: you can compare your EBITDA margin against competitors or industry averages to see where you stand. See our guide on how to measure profitability for more ways to track your performance
• Tracking growth: monitoring EBITDA over time helps you spot trends in your operating performance, separate from changes in your tax strategy or financing

Who uses EBITDA

EBITDA is used by a wide range of stakeholders, each with a slightly different purpose.

• Small business owners: you can use EBITDA to track your operating profitability and identify areas where your core business is improving or declining
• Investors and venture capitalists: they rely on EBITDA to compare potential investments across different industries and capital structures
• Lenders and banks: financial institutions use EBITDA to calculate debt coverage ratios and determine whether your business can handle loan repayments
• Business brokers and valuators: when pricing a business for sale, EBITDA multiples are one of the most common valuation methods for small and mid-sized companies
• Accountants and financial advisors: your accountant may use EBITDA alongside other metrics to give you a fuller picture of your financial performance

How to calculate EBITDA

You can calculate EBITDA using 2 common formulas. Both give you the same result; the difference is your starting point.

Net income method

Start with your net income from your income statement, then add back interest, taxes, depreciation, and amortization.

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

Operating income method

If you already know your operating income (also called operating profit), you only need to add back depreciation and amortization, since interest and taxes are already excluded.

EBITDA = Operating income + Depreciation + Amortization

EBITDA margin

Your EBITDA margin shows what percentage of your total revenue turns into operating profit. It's a useful way to compare profitability across businesses of different sizes.

EBITDA margin = (EBITDA / Total revenue) x 100

For example, if your EBITDA is $200,000 and your total revenue is $1,000,000, your EBITDA margin is 20%. You can pull the figures you need to run these calculations from the financial reports in your accounting software.

EBITDA calculation example

Here's a worked example to show how the net income method works in practice.

Say your business reports the following figures for the year.

• Net income: $250,000
• Interest expenses: $30,000
• Tax expenses: $70,000
• Depreciation: $120,000
• Amortization: $80,000

Using the formula: EBITDA = $250,000 + $30,000 + $70,000 + $120,000 + $80,000 = $550,000.

Your EBITDA is $550,000. This tells you that your business generated $550,000 in operating profit before the effects of financing, taxes, and non-cash charges. To find your EBITDA margin, divide $550,000 by your total revenue. If revenue was $2,000,000, your EBITDA margin would be 27.5%.

What is a good EBITDA?

There's no single number that counts as a "good" EBITDA. What's healthy for your business depends on your industry, company size, and growth stage.

EBITDA margins vary significantly across industries. Software and technology companies often see margins of 25% or higher, while retail and food service businesses may operate with margins closer to 5–10%. Comparing your margin to businesses in your own industry gives you a more meaningful benchmark than chasing a universal target.

Buyers and investors also look at EBITDA multiples when valuing a business. An EV/EBITDA (enterprise value to EBITDA) multiple tells you how many years of current EBITDA it would take to equal the company's total value. Smaller businesses typically trade at lower multiples (3–5x), while larger or high-growth companies can command 8–12x or more.

The most useful approach is to track your own EBITDA and EBITDA margin over time. Consistent improvement signals that your operations are becoming more efficient, regardless of what the "average" looks like in your industry.

EBITDA vs EBIT vs EBT

EBITDA, EBIT, and EBT are related profitability metrics, but each one includes different expenses. Understanding the differences helps you choose the right measure for your situation.

• EBITDA (earnings before interest, taxes, depreciation, and amortization): strips out the most expenses, giving you the broadest view of operating performance
• EBIT (earnings before interest and taxes): includes depreciation and amortization, so it reflects the cost of using your assets over time. EBIT is sometimes called operating profit
• EBT (earnings before taxes): includes both depreciation/amortization and interest, so it reflects your profitability after accounting for debt costs but before taxes

EBITDA is most useful for comparing businesses with different asset bases or financing structures. EBIT works well when you want to factor in asset wear and tear. EBT is helpful when you want to see profitability before tax, especially when comparing businesses in different tax jurisdictions.

What EBITDA doesn't tell you

EBITDA is a helpful metric, but it has real limitations. Relying on it alone can give you an incomplete picture of your business's financial health.

• It ignores capital expenditures: EBITDA doesn't account for the cost of buying or replacing equipment, vehicles, or other assets your business needs to operate. A company with high capital needs may look more profitable on an EBITDA basis than it actually is
• It doesn't reflect debt obligations: because EBITDA adds back interest, it can mask how much of your cash flow goes toward servicing debt. A business with a strong EBITDA but heavy debt payments may still struggle financially
• It's not a GAAP metric: EBITDA isn't recognized under generally accepted accounting principles (GAAP), which means there's no standardized way to calculate it. Different businesses may calculate it slightly differently, making direct comparisons less reliable
• It doesn't measure cash flow: EBITDA is an accounting measure, not a cash flow measure. It doesn't tell you how much cash your business actually has on hand or whether you can cover upcoming expenses
• It can be manipulated: because EBITDA excludes several real costs, some businesses use it to make their financial performance look stronger than it is

For a fuller picture, use EBITDA alongside your cash flow statement, net profit, and other profitability ratios.

Adjusted EBITDA

Adjusted EBITDA takes the standard EBITDA calculation and removes one-time or non-recurring items that don't reflect your ongoing operating performance.

These adjustments might include things like legal settlement costs, restructuring expenses, one-off equipment repairs, or revenue from a discontinued product line. By stripping these out, adjusted EBITDA gives a cleaner view of what your business earns under normal conditions.

Adjusted EBITDA is especially relevant if you're preparing to sell your business. Buyers want to understand the sustainable earnings they're acquiring, not a figure inflated or deflated by unusual events. Your accountant can help you identify which items qualify as legitimate adjustments and which are part of regular operations. Learn more about preparing your financial statements for this process.

Track your EBITDA with Xero

Calculating EBITDA starts with having accurate, up-to-date financial data. Xero's cloud accounting software keeps your income, expenses, and financial reports organized in one place, so you can pull the numbers you need without digging through spreadsheets.

With Xero, you can run profit and loss reports, track expenses by category, and monitor your business performance in real time. That makes it straightforward to calculate your EBITDA and EBITDA margin whenever you need them. Get one month free.

FAQs on EBITDA

Here are some frequently asked questions about EBITDA and how it applies to your business.

Is EBITDA the same as gross profit?

No. Gross profit is your revenue minus the direct costs of producing your goods or services (cost of goods sold). EBITDA starts with net income and adds back interest, taxes, depreciation, and amortization, so it includes operating expenses that gross profit doesn't account for.

Does EBITDA include salaries?

Yes. Salaries and wages are operating expenses that are already factored into net income before you calculate EBITDA. EBITDA only adds back interest, taxes, depreciation, and amortization; it doesn't remove payroll costs.

Is EBITDA the same as operating profit?

Not exactly. Operating profit (EBIT) includes depreciation and amortization as expenses, while EBITDA adds those back in. EBITDA will always be equal to or higher than operating profit for the same business.

Can EBITDA be negative?

Yes. A negative EBITDA means your business's core operations are spending more than they earn, even before accounting for interest, taxes, depreciation, and amortization. It's a strong signal that your revenue, pricing, or cost structure needs attention.

What is the difference between EBITDA and EBITA?

EBITA stands for earnings before interest, taxes, and amortization; unlike EBITDA, it doesn't add back depreciation, so it factors in physical asset wear and tear. It's less commonly used but can be helpful for businesses with significant tangible assets.