EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortisation — a company's profit with four real costs added back in. It is meant to show what the core business earns before financing and accounting choices muddy the picture.
Start from net income — the bottom-line profit. Then add back four things. Interest: what the company pays its lenders, which depends on how it chose to finance itself, not on how good the business is. Taxes: which depend on jurisdiction and accounting, not on the product. Depreciation: a non-cash charge spreading the cost of physical assets (factories, servers) across their useful life. Amortisation: the same idea for intangible assets (patents, acquired software). Add all four back to net income and you have EBITDA.
The pitch is that this makes two companies comparable even if one is loaded with debt and the other is not, or one bought its factory outright and the other leases. You are looking at the operating engine with the financing and accounting bodywork stripped off.
Example (illustrative): a company reports $100m in revenue, $60m in operating costs, $10m of depreciation, $8m of interest on its debt, and pays $5m of tax. Net income is 100 − 60 − 10 − 8 − 5 = $17m. EBITDA adds back depreciation, interest and tax: 17 + 10 + 8 + 5 = $40m. The same company is a "$17m profit" business or a "$40m EBITDA" business depending on which number the press release leads with — which is exactly why you should know the difference. Note the operating margin here is 30%, while the EBITDA margin is 40%.
EBITDA is most often seen as the bottom of the EV/EBITDA ratio, where the top is enterprise value. Because EV already includes debt and subtracts cash, and EBITDA already ignores interest, the two are consistent with each other: both describe the whole business regardless of how it is financed. That is why acquirers and analysts quote EV/EBITDA when comparing a debt-free company to a leveraged one, where the P/E ratio would give a misleading answer.
EBITDA is not cash flow, and treating it as such is one of the most expensive beginner mistakes in investing. It ignores the cash needed to replace worn-out equipment, and it ignores the interest bill — so a company drowning in debt can post a proud EBITDA number the same year it cannot pay its lenders. If you want to know whether real money is piling up, look at free cash flow, which subtracts capital spending instead of adding it back. Read EBITDA as one lens, never as the verdict. None of this is investment advice.
No. EBITDA is profit before interest, taxes, depreciation and amortisation — four costs that are mostly real. Net income is the profit after all of them, and it is the smaller, more conservative number.
Because it is almost always the flattering number. Adding back four costs can only make earnings look bigger, which is why a company with heavy debt or heavy capital spending tends to lead with EBITDA rather than net income.
No, and this is the classic trap. EBITDA adds depreciation back but ignores the capital spending that replaces the depreciating assets, and it ignores interest and tax paid in cash. Free cash flow is the metric that tracks actual money left over.
Browse all S&P 500 tickers to see this metric applied to individual companies.
Educational research only — not investment advice.