What Is EBITDA?
EBITDA is one of the most widely used measures of business profitability. Here's what it means and when to use it.
Key Takeaways
- EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation.
- It strips out financing and accounting decisions to show core operating profitability.
- EBITDA is widely used in business valuations — most SMEs sell at 3–8x EBITDA.
What EBITDA stands for
EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortisation. It takes your net profit and adds back these four items: interest payments (financing decisions), tax (jurisdiction decisions), depreciation (non-cash asset write-down), and amortisation (non-cash intangible write-down). What remains is a proxy for the cash profit your business operations generate.
Why add these things back?
Interest and tax are affected by how you've structured and financed the business — not by how well the core operations perform. Depreciation and amortisation are accounting entries, not cash out of the door. By removing all four, EBITDA makes it easier to compare businesses across different structures, tax positions, and accounting policies.
When EBITDA is useful
EBITDA is most useful when comparing businesses for acquisition or investment, or when talking to investors and lenders who want to understand underlying operational performance. It's less useful for day-to-day cash management, where actual cash profit and cash flow matter more.
EBITDA and valuation
Business sale prices are commonly expressed as a multiple of EBITDA. A £200,000 EBITDA business at a 5x multiple is worth £1 million. Multiples vary by sector, growth rate, and customer concentration. Knowing your EBITDA and the typical multiple for your sector tells you roughly what your business is worth today.