EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation - essentially, it's a measure of your company's operating performance that shows how much cash your core business generates before accounting for financing costs, tax obligations, and non-cash expenses.
Investors use EBITDA because it strips away variables like tax rates, financing structures, and accounting decisions to reveal how well your actual business operations are performing.
It allows them to compare companies fairly, even if they're in different countries or have different capital structures.
Whilst profit accounts for all expenses including interest payments, taxes, and asset depreciation, EBITDA focuses purely on operational performance.
Think of it as measuring how good you are at running your core business, regardless of how you've financed it or what tax jurisdiction you're in.
EBITDA can be misleading because it ignores real cash expenses like loan repayments and tax bills that you actually need to pay.
Companies with high EBITDA might still struggle with cash flow if they have significant debt or capital expenditure requirements.
Start with your net income (profit), then add back interest expenses, taxes, depreciation, and amortisation.
Alternatively, you can start with revenue and subtract only operating expenses like wages, rent, and materials - excluding the items mentioned above.
EBITDA becomes particularly relevant when you're seeking investment, preparing for acquisition, or once you've reached a scale where operational efficiency matters more than pure growth.
Early-stage pre-revenue startups typically won't focus on it yet.
Generally yes, but context matters significantly.
A higher EBITDA margin (EBITDA as a percentage of revenue) suggests efficient operations, but you need to ensure you're not underinvesting in areas crucial for long-term growth, such as product development or customer acquisition.
