EBITDA is a key financial metric used to analyse a company’s operating performance. It is widely used in financial reports, investor presentations and M&A transactions to assess profitability and compare businesses.
However, despite being widely used in the business world, it is not always clear what EBITDA actually means or what it really tells us about a company’s financial situation.
In this article, we explain what EBITDA is, how it is calculated and what it is used for in financial analysis. We will also look at a simple example to better understand it and highlight its main limitations.
What is EBITDA and what does it mean?
Index of contents
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Although EBITDA is widely used, it is not defined under IFRS accounting standards. Therefore, its calculation may vary slightly depending on how each company presents its financial information.
It is a financial metric used to assess a company’s operating performance, meaning the results generated by its core business activities.
To do this, EBITDA excludes:
- financial expenses related to debt
- taxes
- depreciation and amortization
This allows analysts to focus on the underlying performance of the business, without the impact of financing decisions or accounting treatments.
In other words, EBITDA gives an idea of how much a company generates from its core operations, before considering how it is financed or how certain costs are recorded.
It is important to note that EBITDA is not an official accounting metric under IFRS, but rather a widely used financial indicator.
EBITDA formula
EBITDA can be calculated in different ways depending on the available financial information. In practice, there are two common approaches.
Basic formula
The most common method starts from operating profit (EBIT) and adds back depreciation and amortization:
EBITDA = EBIT + depreciation + amortization
- EBIT is earnings before interest and taxes
- Depreciation and amortization reflect the loss of value of assets over time
Alternative formula from revenue
EBITDA can also be calculated directly from revenue:
EBITDA = revenue − operating expenses (excluding depreciation and amortization)
This includes expenses such as:
- staff costs
- rent
- utilities
- external services
But excludes depreciation, interest and taxes.
What is EBITDA used for?
EBITDA is widely used because it provides a clear view of how well a business performs operationally.
Analysing operating performance
It helps determine whether the core business is generating results, without being affected by financing or tax structures.
Comparing companies
Two companies may have very different net profits due to differences in debt or taxation, but their EBITDA may still be similar. This makes it useful for comparing companies within the same sector.
Valuing companies
EBITDA is commonly used in investment and M&A transactions through valuation multiples.
For example, if a company generates €500,000 EBITDA and the market applies a 6x multiple, its estimated value could be around €3 million.
Assessing debt repayment capacity
EBITDA is also used by lenders and investors to evaluate whether a company can meet its financial obligations.
EBITDA calculation example
| Concept | Amount |
|---|---|
| Revenue | €1,000,000 |
| Staff costs | −€320,000 |
| Other operating expenses | −€280,000 |
| Rent and utilities | −€100,000 |
| EBITDA | €300,000 |
| Depreciation | −€80,000 |
| EBIT | €220,000 |
| Interest | −€30,000 |
| Taxes | −€50,000 |
| Net profit | €140,000 |
As shown in the example, EBITDA reflects operating performance before taking into account depreciation, interest and taxes. For this reason, it is a useful indicator for analysing a business’s ability to generate results from its core activities.
In addition, this type of calculation helps to better understand how different financial metrics are connected within the income statement.
Differences between EBITDA and EBIT
What is EBIT?
EBIT (Earnings Before Interest and Taxes) represents profit before interest and taxes. Unlike EBITDA, it does include depreciation and amortization.
This means that EBIT reflects the company’s operating result after taking into account the economic wear and tear of its assets, such as machinery, equipment or facilities.
In other words, EBIT sits one step below EBITDA in the income statement.
EBITDA vs EBIT comparison
| Metric | What it measures | Includes depreciation |
|---|---|---|
| EBITDA | Operating performance before interest, taxes, depreciation and amortization | No |
| EBIT | Operating profit before interest and taxes | Yes |
When to use each
As mentioned above, EBITDA is typically used when analysing the operating capacity of a business or when comparing companies, as it removes financial and accounting elements that could distort the comparison.
EBIT, on the other hand, is more useful when you want to take into account the impact of asset investments and their depreciation.
This is particularly relevant in capital-intensive sectors, such as industry, energy or telecommunications.
EBITDA margin: what it is and how to interpret it
In addition to analysing EBITDA in absolute terms, it is also common to look at the EBITDA margin, which relates this metric to the company’s revenue.
The formula is straightforward:
EBITDA margin = EBITDA / revenue × 100
For example, if a company has:
- revenue: €1,000,000
- EBITDA: €300,000
its EBITDA margin would be 30%.
This percentage shows what portion of revenue is converted into operating profit.
How to interpret the EBITDA margin
A high EBITDA margin generally indicates that the company’s business model allows it to operate with relatively strong margins.
On the other hand, a low EBITDA margin may reflect a heavier cost structure, greater competitive pressure or a sector with tighter margins.
In any case, what really matters is comparing the EBITDA margin with that of other companies in the same sector, as profitability levels can vary significantly across industries.
Normalized EBITDA: what it is and when it is used
Normalized EBITDA is a common concept in financial analysis, particularly in investment processes or M&A transactions.
It refers to an adjusted EBITDA that removes certain income or expenses that are not related to the company’s ordinary business activity or are unlikely to recur in the future.
This provides a more accurate picture of the company’s recurring profitability, meaning the results generated under normal operating conditions.
Common adjustments include:
- one-off indemnities
- extraordinary legal expenses
- exceptional income
- restructuring costs
For example, if a company incurs a significant one-off expense due to a legal dispute, this cost may distort the results for that year, even though it is not part of the normal course of business. In such cases, that expense can be adjusted to calculate a normalized EBITDA that better reflects the company’s underlying performance.
This metric is widely used in investment processes, due diligence and M&A transactions, where the focus is on understanding the company’s ability to generate sustainable results.
Limitations of EBITDA
Although EBITDA is a widely used metric in financial analysis, it also has important limitations that should be taken into account. For this reason, it should not be analysed in isolation, but alongside other financial indicators.
First, EBITDA is not the same as net profit, as it excludes relevant elements such as interest on debt, taxes and depreciation.
In addition, it does not reflect the company’s actual cash flow. A business may show a high EBITDA and still face liquidity issues if it requires significant capital expenditure or carries a high level of debt.
Another limitation is that EBITDA does not consider the company’s financial structure. Two companies may report similar EBITDA figures but be in very different situations if one is highly leveraged and the other is not.
Finally, since EBITDA is not formally defined under IFRS, and although its calculation is generally consistent, there may be slight variations depending on how each company presents it. For this reason, it is usually analysed alongside other metrics such as EBIT, net profit or cash flow.
EBITDA can sometimes be misleading if analysed in isolation, as it may overestimate a company’s financial strength by ignoring capital expenditure requirements and working capital needs.
EBITDA and company valuation
In valuation processes, EBITDA is commonly used through valuation multiples to obtain an initial estimate of a company’s value.
The logic is relatively straightforward: if a company generates a certain level of EBITDA on a recurring basis, investors may be willing to pay a multiple of that figure.
For example, if a company has a normalized EBITDA of €500,000 and companies in the same sector are valued at 6x EBITDA, the indicative value of the business could be:
€500,000 × 6 = €3,000,000
From there, further adjustments are typically made for factors such as net financial debt, available cash or potential contingencies.
Therefore, although EBITDA is often used as a starting point in valuation, the final price of a company always depends on a broader analysis of the business, its financial position and its growth prospects.
How LEIALTA can help
EBITDA is a useful tool for analysing a company’s operating performance, but it needs to be interpreted alongside other financial indicators to properly understand the business.
At LEIALTA, we help companies and executives analyse their financial situation, interpret key metrics such as EBITDA and make more informed strategic decisions.
If you need support with financial analysis, business valuation or strategic planning, our team can assist you with a rigorous and practical approach.
