TL;DR: EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It takes a company's operating result and adds back the two large non cash charges, depreciation and amortization, after removing the effects of interest and taxes, to approximate the cash earning power of the operations alone. For the illustrative company below, operating income of $200 plus depreciation of $60 plus amortization of $20 gives EBITDA of $280, an EBITDA margin of 28 percent on $1,000 of revenue, since $280 divided by $1,000 equals 0.28. EBITDA is a useful comparison shortcut. It is not cash flow, because real businesses must still pay interest, taxes, and eventually replace the assets being depreciated.
Key Takeaways
- EBITDA can be built two ways that must agree: operating income plus depreciation plus amortization, or net income plus interest plus taxes plus depreciation plus amortization.
- It strips out financing choices (interest), tax situations, and non cash accounting charges so companies can be compared on operations alone.
- The EBITDA margin, EBITDA divided by revenue, is the quick comparison form of the measure.
- It ignores capital expenditure, working capital, interest, and taxes, all of which are real cash claims. Treating EBITDA as cash flow is the classic misuse.
- It is not a standardized accounting measure, so two companies may compute it slightly differently. Always check what a reported figure includes.
Where EBITDA comes from on the income statement
All figures in this section are illustrative. An illustrative company reports revenue of $1,000. Its operating income, the profit from operations after all operating expenses including depreciation and amortization, is $200. Inside those operating expenses sit depreciation of $60 and amortization of $20. Adding them back gives EBITDA: $200 plus $60 plus $20 equals $280.
Check the same figure from the bottom of the statement. Below operating income, the company pays interest of $30, which leaves earnings before tax of $170, since $200 minus $30 equals $170. Taxes of $40 leave net income of $130, since $170 minus $40 equals $130. Now build EBITDA from net income by adding back everything its name excludes: $130 plus interest of $30 plus taxes of $40 plus depreciation of $60 plus amortization of $20 equals $280. Both routes land on $280, which is the internal consistency check any EBITDA figure should pass against its own income statement. Our guide to how to read an income statement walks through each of these lines in order.
The margin form compresses the result: $280 divided by $1,000 of revenue equals 0.28, or 28 percent. That percentage is what analysts usually compare across companies and across years, because it removes size from the comparison in the same way profit margins do at the gross, operating, and net levels.
Why investors and lenders use it at all
EBITDA exists to answer a narrow comparison question: how much does the underlying operation earn before the owner's financing decisions and accounting conventions get involved. Two identical businesses can report very different net incomes because one borrowed heavily and one did not, or because one bought its equipment recently and carries large depreciation while the other owns older, mostly depreciated assets. EBITDA puts both on the same footing for that one question.
Lenders use it because debt is serviced from operating earning power, and ratios such as enterprise value to EBITDA, covered in our guide to enterprise value, price whole companies in merger markets using it as the earnings yardstick. Private company sale prices are commonly quoted as a multiple of EBITDA for the same reason: the buyer is purchasing the operation, and will replace the seller's financing and tax structure with their own.
Where EBITDA misleads
First, depreciation is a real economic cost wearing an accounting costume. The machines, vehicles, and buildings being depreciated are wearing out, and replacing them will take cash the EBITDA figure pretends is available. A business can look healthy on EBITDA while consuming its asset base. Compare it with free cash flow, which subtracts capital expenditure and therefore refuses to ignore replacement cost.
Second, EBITDA ignores working capital. A growing company can post rising EBITDA while cash pours into inventory and unpaid customer invoices. The profit is booked, the cash is not in the bank, and the gap has ended real businesses.
Third, interest and taxes are not optional in real life. They are senior claims on the same earnings EBITDA describes. A heavily indebted company and a debt free company with identical EBITDA are not equally safe, and any analysis that stops at EBITDA cannot see the difference. Read EBITDA as the start of a cash analysis, alongside the cash flow statement in our guide to how to read a cash flow statement, never as its conclusion.
Sources and method
- Target keyword: "what is EBITDA" from .saeo/keywords.yaml (queue entry added 2026-10-28). No search volume or difficulty figure is claimed; both are recorded as unknown in the queue entry.
- All company figures are labelled illustrative examples. Arithmetic verified for this draft on 2026-10-28: 200 plus 60 plus 20 equals 280; 200 minus 30 equals 170; 170 minus 40 equals 130; 130 plus 30 plus 40 plus 60 plus 20 equals 280; 280 divided by 1,000 equals 0.28, or 28 percent.
- Internal links checked against existing drafts in this folder on 2026-10-28: how-to-read-an-income-statement, profit-margins-explained, what-is-enterprise-value (drafted in this same run), what-is-free-cash-flow, how-to-read-a-cash-flow-statement.
