What Is EBITDA? Definition

What is EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It measures operating profitability by adding those items back to net income, and it is often used to compare businesses and in valuations.

Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps interest, depreciation, and amortization recorded in separate accounts, so EBITDA can be calculated cleanly from the statements.

How to calculate it

Start with net income from the profit and loss statement
Add back interest, income taxes, depreciation, and amortization
Review other unusual items with your accountant before using the figure externally

A worked example

The figures below are illustrative. A firm has net income of $300,000, interest expense of $15,000, taxes of $90,000, depreciation of $12,000, and amortization of $8,000. Its EBITDA is $425,000.

Common mistakes

Treating EBITDA as cash flow, since it ignores working capital and capital spending
Adding back costs that are real recurring expenses
Comparing EBITDA across firms that account for items differently

How buyers adjust it

In a sale, buyers usually look at adjusted EBITDA. The price is often discussed as a multiple of that figure, and the multiple depends on factors such as size, growth, revenue concentration, and the quality of the earnings. See valuation multiple and due diligence for how the review works.

Owner pay compared with a market salary
One-time costs or gains that will not repeat
Personal expenses paid through the business

Why it matters for service firms

EBITDA is a common starting point in a sale or loan discussion, so owners should understand it. It works best alongside cash flow, because a firm can have healthy EBITDA and still run short of cash.

Frequently asked questions

Is EBITDA the same as cash flow?

No. EBITDA ignores changes in working capital, capital spending, and debt payments. A firm can show strong EBITDA while cash is tight, so read it together with the cash flow statement.

Why do buyers use EBITDA?

It gives a way to compare operating performance across firms by removing financing, tax, and non-cash items. Buyers often adjust it for one-time items, so expect a discussion about what is included.

EBITDA