What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out four items that vary by capital structure, jurisdiction, and accounting policy, leaving a cleaner view of a business's core operating profitability. A company with high debt (high interest), a generous depreciation schedule, or a favourable tax arrangement looks very different on net income than on EBITDA — which is precisely why EBITDA is the metric used most in business valuations and M&A, where comparing businesses on an even footing matters.

The Formula

What gets added back: Interest (reflects how the business is financed, not how it operates); Taxes (vary by jurisdiction and structure); Depreciation and Amortization (accounting allocations of past capital spending, not current cash). What remains is a proxy for operating cash generation — imperfect but comparable across businesses.

Typical EV/EBITDA Multiples by Industry

• SaaS / software: 10–20× or more for high-growth
• Manufacturing / industrial: 5–8×
• Retail: 5–9×
• Healthcare: 8–14×
• Professional services: 6–10×
• Higher growth, higher margin, and more predictable revenue command higher multiples

Worked Example

A company has revenue of $5M, net income of $300,000, interest expense of $50,000, taxes of $100,000, and D&A of $80,000. EBITDA = $300,000 + $50,000 + $100,000 + $80,000 = $530,000. EBITDA margin is $530,000 ÷ $5,000,000 = 10.6%. At an 8× EV/EBITDA multiple, implied enterprise value is $4.24M. Net income alone ($300,000, or 6% margin) told a very different story than EBITDA does.

Limitations of EBITDA

• Ignores capex: a business with heavy equipment replacement needs looks better on EBITDA than it really is
• Can be manipulated: aggressive add-backs beyond the standard four inflate "adjusted EBITDA"
• Not cash flow: Warren Buffett famously dislikes EBITDA because it ignores real capex requirements
• Use alongside free cash flow and operating margin for a complete picture

EBITDA in Practice

When evaluating a business acquisition or investment, EBITDA is always the starting point — but the work is in understanding what's been added back. A well-run business presents a clean EBITDA with standard add-backs of interest, tax, and D&A. A company with pages of "adjusted EBITDA" adjustments for one-off items, management salaries treated as non-recurring, and related-party transactions deserves significant scrutiny — every add-back is a claim that the item won't recur, and history often proves otherwise. The multiple you pay on clean EBITDA is a very different investment than the same multiple on a heavily adjusted figure.

The most important question to ask when reviewing any adjusted EBITDA figure is: "Could this business be run by a third-party management team at the same cost?" Owner-operators often run personal expenses through the business, pay family members above-market rates, or own assets personally that they lease back to the business. Normalising for these is legitimate; treating every one-off cost as non-recurring is not. When evaluating an acquisition, ask for three years of financial statements and reconcile each EBITDA add-back independently. The quality of the EBITDA number is as important as the number itself.

Frequently Asked Questions