What EBITDA measures
EBITDA (earnings before interest, taxes, depreciation and amortization) approximates the profit a business generates from its operations, before financing decisions, taxes and accounting charges for past investments. It is widely used to compare companies and to value them.
The formulas
- EBIT = net income + interest + income taxes
- EBITDA = EBIT + depreciation + amortization
- EBITDA margin = EBITDA ÷ revenue
- Net debt to EBITDA = (debt − cash) ÷ EBITDA
- EV/EBITDA = enterprise value ÷ EBITDA
Worked example
| Item | Amount |
|---|---|
| Revenue | $2,000,000 |
| Net income | $150,000 |
| Interest expense | $30,000 |
| Income taxes | $50,000 |
| Depreciation and amortization | $70,000 |
| Net debt | $600,000 |
- EBIT: 150,000 + 30,000 + 50,000 = $230,000, an 11.5% margin.
- EBITDA: 230,000 + 70,000 = $300,000, a 15% margin.
- Net debt to EBITDA: 600,000 ÷ 300,000 = 2.0×.
Typical EBITDA margins
| Sector | Typical margin |
|---|---|
| Software | 25 to 40% |
| Health care services | 10 to 20% |
| Manufacturing | 10 to 20% |
| Retail | 5 to 10% |
| Restaurants | 5 to 15% |
Leverage and valuation
Lenders use net debt to EBITDA to judge how much a company can borrow. Under about 2× is usually seen as comfortable, 3 to 4× as typical for leveraged buyouts, and more as risky. Buyers of small private businesses often pay 3 to 6 times EBITDA, while large listed companies trade at higher multiples depending on growth and sector.
Adjusted EBITDA
Companies often report “adjusted” EBITDA that removes one-off items such as restructuring costs, owner’s excess compensation or stock-based pay. Adjustments can be legitimate, but they can also flatter results. Always check what was added back.
Limits
EBITDA ignores capital expenditure, changes in working capital, interest and taxes, all of which are real cash costs. A capital-intensive business can show strong EBITDA and still burn cash. Look at free cash flow alongside it.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.