What does EBITDA stand for?

Earnings Before Interest, Taxes, Depreciation and Amortization — profit measured before financing costs, tax, and the accounting write-down of assets.

How do you calculate EBITDA?

EBITDA = net income + interest + taxes + depreciation + amortization. Or, from the top: operating profit (EBIT) + depreciation + amortization.

Why do buyers use EBITDA?

It lets them compare businesses without the noise of different debt levels, tax positions, and depreciation schedules. Most small-business sale prices are quoted as a multiple of EBITDA or of seller's discretionary earnings.

What is a good EBITDA margin?

It is entirely industry-specific. Software often exceeds 30%, professional services 10–20%, retail and hospitality frequently under 10%. Compare only against your own industry and your own history.

What Is EBITDA and How Do You Calculate It?

EBITDA is profit with the financing and accounting noise stripped out. It's the number buyers, lenders, and investors reach for first — and the one most likely to flatter a business.

What each letter means

E — Earnings. Profit.
BI — Before Interest. How much debt you carry is a financing decision, not an operating one.
T — Taxes. Depends on your jurisdiction and structure, not your operations.
D — Depreciation. Spreading the cost of equipment over its life. No cash moves.
A — Amortization. The same idea for intangibles like software or goodwill.

The formula

EBITDA = net income + interest + taxes + depreciation + amortization

Example: $60,000 net income, $8,000 interest, $15,000 taxes, $20,000 depreciation, $5,000 amortization → EBITDA of $108,000. On $500,000 of revenue that's a 21.6% EBITDA margin.

Why anyone cares

Two businesses with identical operations can report very different net profit purely because one borrowed to buy its equipment and the other leased. EBITDA puts them side by side. That's why sale prices are usually quoted as a multiple of EBITDA.

Where EBITDA misleads

Equipment wears out. Depreciation is not a fiction — you will replace that machine. EBITDA pretends otherwise.
Debt is real. Interest gets paid in cash regardless of what EBITDA says.
Owner's pay. In owner-operated businesses, buyers often adjust to seller's discretionary earnings — EBITDA plus one owner's salary and personal expenses.

The practical takeaway

Use EBITDA to judge whether the operations are healthy and to talk to buyers and lenders in their language. Use net profit and cash in the bank to judge whether the business can pay you this month.