EBITDA (earnings before interest, taxes, depreciation, and amortization) is a standardized earnings measure that strips out financing, tax, and non-cash accounting charges.

How it works

Take net income (or start from EBIT), add back interest, taxes, depreciation, and amortization. The result approximates recurring operating performance before capital structure and accounting allocation choices.

A company with $10M EBIT plus $2M depreciation reports $12M EBITDA. PE buyers might pay 8× EBITDA ($96M enterprise value)—simplified example; real multiples vary by sector and growth.

Adjusted EBITDA adds back one-time costs—restructuring, litigation, owner perks—to show “run-rate” performance. Buyers and sellers negotiate adjustments aggressively; every add-back is a debate.

Venture startups rarely discuss EBITDA until late stage. SaaS companies may reach “EBITDA breakeven” while still prioritizing growth reinvestment.

Why it matters

• Founders: When you pitch profitability, define the metric. EBITDA-positive with heavy stock comp and capex differs from free cash flow positive.
• Investors: Growth equity and PE underwrite on EBITDA margins and expansion. Lenders set maintenance covenants on trailing twelve-month EBITDA.
• Acquirers: Enterprise Value to EBITDA multiples benchmark deal pricing.

Common mistake

Treating EBITDA as actual cash available to owners. EBITDA ignores capex, working capital, stock-based compensation, and debt service—critical for leveraged companies.

Related ideas

• EBIT — before D&A add-back
• EBITDA Margin — EBITDA as percent of revenue
• Enterprise Value — numerator in EV/EBITDA
• Dividend Recapitalization — debt sized on EBITDA