Definition
EBITDA is earnings before interest, taxes, depreciation, and amortization, a measure of a business's operating profitability.
How It Works
It starts with net income and adds back interest, taxes, depreciation, and amortization to show operating performance independent of financing and accounting choices. It is widely used to value businesses, often as a multiple.
Example
A business valued at six times EBITDA with $2 million of EBITDA would carry an enterprise value near $12 million.
When It Works Best
It is most useful for comparing operating performance across businesses and for valuation in a sale.
Who It Applies To
Business owners, buyers, and investors.
Watch-Outs
EBITDA ignores real costs like capital expenditures and debt service, and owner perks or one-time items often need to be adjusted out to reach a true figure.
