top of page
Search

What Is EBITDA and Why It Matters

  • Writer: Miranda Kishel
    Miranda Kishel
  • Nov 26
  • 3 min read
EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a financial metric used to measure your company’s core operating performance—essentially, how profitable your business is before accounting for financial structure and non-cash expenses.


Here’s the formula:

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

In plain English: EBITDA helps you understand your true operating profit—the money your business generates from its core operations, without the noise of financing decisions or accounting adjustments.


2. Why EBITDA Matters to Small Business Owners


EBITDA is one of the most important metrics for evaluating business performance—especially when you’re looking to:


  • Understand profitability: It shows how efficiently your business operates before external factors.

  • Compare performance: Investors, lenders, and buyers use it to compare your company with others in your industry.

  • Support valuation and lending: Many business valuations, acquisitions, and loan covenants rely on EBITDA as a proxy for cash flow.

  • Plan growth: By stripping out non-operational costs, you can better assess how well your operations generate profits.

In short, EBITDA helps you—and potential investors—see the earning power of your business.


Want to know how EBITDA fits into your business valuation? Visit our Development Theory page to learn more.

3. Common Examples or Use Cases


A. Business Valuation


Buyers often use EBITDA multiples to estimate business value. Example: If similar businesses sell for 5× EBITDA, and your EBITDA is $400,000, your estimated enterprise value is roughly $2 million (5 × 400,000).


B. Loan Applications


Banks and lenders assess EBITDA to determine your ability to repay loans—it reflects your business’s cash-generating strength.


C. Internal Performance Tracking


Business owners use EBITDA to measure improvement over time. By comparing quarterly EBITDA, you can track operational efficiency without being distorted by tax changes or interest costs.


According to Investopedia, EBITDA provides a clearer view of operational profitability but should be used alongside other metrics since it doesn’t reflect all cash outflows.


4. Related Terms or Misconceptions


EBIT: Earnings Before Interest and Taxes. Similar to EBITDA but excludes depreciation and amortization.


Adjusted EBITDA: A modified version that removes one-time or non-recurring expenses (e.g., legal fees, restructuring costs) to show normalized performance.


Free Cash Flow (FCF): Unlike EBITDA, FCF accounts for capital expenditures and working capital—making it a closer measure of available cash.


Common Misconceptions:


  • EBITDA = Cash Flow. Not exactly—EBITDA excludes taxes, capital expenses, and working capital changes.

  • Higher EBITDA = Better Business. Not always. Quality of earnings, consistency, and growth potential matter just as much.


5. Tips for Applying This Concept in a Real Business


  • Track EBITDA monthly or quarterly. Use it as a benchmark for operational performance and budgeting.

  • Compare trends, not just totals. Consistent growth in EBITDA signals improving efficiency.

  • Use Adjusted EBITDA for clarity. Remove unusual expenses or owner perks for a true picture of business performance.

  • Monitor your EBITDA margin.

    EBITDA Margin = EBITDA ÷ Revenue × 100A higher margin means stronger operational profitability.

  • Don’t rely on EBITDA alone. Pair it with cash flow and net income for a balanced view of financial health.

Quick Takeaway: EBITDA is one of the most practical tools for understanding business performance and valuing your company. It highlights what your operations truly earn, making it essential for financial planning, valuation, and long-term decision-making.


Learn how your EBITDA influences your company’s value with our Valuations Services.

bottom of page