EBITDA Explained for Small Business Owners
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures your business's operating profitability by focusing only on the core operations — stripping out financing costs, accounting adjustments, and tax effects.
The Formula
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
Or more simply: EBITDA = Revenue − Operating Expenses (excluding interest, taxes, depreciation, amortization)
Example
| Item | Amount |
|---|---|
| Revenue | $500,000 |
| COGS | ($200,000) |
| Operating expenses | ($150,000) |
| EBITDA | $150,000 (30% margin) |
Why EBITDA Matters
- Comparability — EBITDA removes the effects of how a business is financed (debt vs equity), making it easier to compare profitability between businesses.
- Valuation — Business buyers use EBITDA multiples to determine a company's value. A business with $150K EBITDA and a 3x multiple is worth $450K.
- Lender perspective — Banks look at EBITDA to assess debt repayment capacity. Higher EBITDA means more room to service loans.
EBITDA vs Net Profit
Net profit includes everything — interest, taxes, depreciation. A business can have positive EBITDA (profitable operations) but negative net profit (high debt payments or large depreciation). EBITDA shows operational health; net profit shows the bottom line.