Definition
EBITDA is the most common earnings metric used when valuing small-to-medium businesses. It measures operating profitability before financing costs, tax obligations, and non-cash charges. EBITDA is preferred over net profit for acquisition analysis because it reflects the cash-generating ability of the business independent of how it is financed.
Formula
EBITDA = Revenue − Operating Expenses (excl. interest, tax, D&A)
Worked Example
A business generates $1,000,000 in revenue with $750,000 in operating costs. Its net profit after interest and tax is $60,000, but EBITDA is $180,000 after adding back $120,000 in interest, tax, depreciation, and amortisation.
Related Terms
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