EBITDA

What EBITDA means

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. The figure is meant to show what a business earns from ongoing operations, without financing, tax burden and depreciation policy distorting the picture. It is therefore used for comparisons between companies whose capital structure differs.

How it is calculated

The starting point is the result before tax. Interest expenses are added back to it, along with depreciation on tangible and intangible assets. The result is EBITDA. The simplified working calculation is revenue minus cost of materials minus staff cost minus other operating expenses.

An example makes the scale clear. A shop with two million euros of revenue, 1.1 million in goods, 400,000 in staff cost and 200,000 in other cost sits at 300,000 euros of EBITDA, which is 15 percent of revenue. Whether that is a lot depends on the industry and the business model.

Where the figure misleads

• No cash flow: EBITDA is a calculated number, not a bank balance. A company with high EBITDA can still fail to pay its bills.
• Depreciation disappears: anyone investing heavily in equipment has real cost. Hiding it makes the result look better than it is.
• Interest disappears: a company with large loans looks as healthy as one without, although the burden is real.
• One off effects: removing special items produces an adjusted EBITDA. How far that adjustment may go is a matter of negotiation.

Why it dominates valuation

When a business is sold, the price is often expressed as a multiple of EBITDA. The multiple depends on industry, growth, size and how strongly the business depends on one person. A shop with repeat customers and stable results reaches a higher factor than one whose revenue hangs on individual campaigns. Because the multiple applies directly to EBITDA, the definition of the figure already decides part of the price.

Frequent questions

• Is EBITDA the same as profit? No, it is an intermediate step on the way there.
• What is a good EBITDA? In online retail, single digit percentages of revenue are normal and double digit percentages are strong.
• Is EBITDA enough for a valuation? No. Revenue quality, customer retention and dependencies belong with it.