The investor’s field guide · E
EBITDA
Earnings before interest, tax, depreciation and amortisation, used to compare operating profitability.
Explained by the editorial team
EBITDA starts with earnings and adds back interest, tax, depreciation and amortisation. It helps readers compare businesses with different financing arrangements or accounting charges. It is not a standardised substitute for reading the accounts, and adjusted versions need a clear reconciliation.
A worked example
A business reports £80,000 net profit, £20,000 interest, £25,000 tax and £15,000 depreciation, with no amortisation. Its EBITDA is £140,000. That does not mean £140,000 is available to its owner: debt repayments, equipment purchases and working capital can all consume cash.
What to examine
Check the period, the accounting basis and any adjustments. Two sellers may use the same label for different calculations. For a capital-intensive business, ignoring the cost of replacing equipment can give a misleading impression of affordability. Compare EBITDA with cash flow and sustainable earnings after necessary spending. The British Business Bank explains EBITDA and its limitations.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.