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• July 29, 2025

EBITDA: Meaning, Formula, Calculation, Example & Benefits

Different businesses of different sizes and stages will normal balance have widely different EBITDA numbers. Bench can cover all your financial reporting and automate your bookkeeping. Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support. This is a popular measure of financial performance for private equity groups. Investors will use EBITDA because it is easier to compare across companies, even if it often paints a less than accurate picture of your business’s profit.

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Company W was formed during a rise in the economy and experienced low interest rates and lower taxes. Even if both companies theoretically earned the same amount, Company G would appear less successful because of the tax responsibility and interest. Here’s how to calculate EBITDA, what it means and some drawbacks of using it in company analysis. Company B had more revenues and a greater EBITDA than Company A. But this doesn’t mean Company B is better performing. Investors and lenders would look at the EBITDA margin of these two companies.

• A lower EV/EBITDA multiple indicates the company is undervalued compared to its profitability.
• We collaborate with business-to-business vendors, connecting them with potential buyers.
• While EBIT states the comapny’s estimated earnings, the former offers a snapshot of its gross income.
• Subtracting total expenses from total revenues, Infosys earned a consolidated operating profit of ₹16,932 crore in FY 2021.
• They often present EBITDA figures in their quarterly reports, thereby offering an added layer of understanding into their operational profitability.
• EBITDA can vary significantly across industries due to different capital structures and operating models.

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• The EBITDA margin takes the basic profitability formula and turns it into a financial ratio that can be used to compare all different sized companies across and industry.
• It’s important to have a breakdown of the interest line in the income statement to ensure the correct figure is added.
• A large disparity between these two multiples could indicate a company is not generating sufficient cash flow to cover its capital expenditures, making it a high-risk investment despite a strong EBITDA figure.
• Note that EBITDA is not a GAAP or IFRS-approved metric, and some investors are wary of using this measurement.
• Depending on how and why you’re analyzing a company, there are a few similar metrics you may consider as well.
• EBIT, or earnings before interest and taxes, is similar to EBITDA and calculates a company’s profitability.

Stocks like this are vulnerable to big declines if growth slows and the EBITDA figures stagnate. Relying too much on EBITDA thus leads to getting caught up in speculative stock market bubbles. EBITDA is used in credit ratios like EBITDA/Interest expense and Debt/EBITDA to evaluate a company’s ability to service its debt obligations.

• You may make a decision to seek equity funding to help pay down debt, and improve your net earnings figure.
• In this case, it’s possible that the business is servicing high debt or is suffering from rising capital and development expenses, and is thus using EBITDA as a way to distract from these challenges.
• To interpret operating profitability objectively, compare companies across different sectors, and identify opportunities for improvement, it is essential to understand EBITDA.
• For business owners, analysts, and investors trying to cut through the accounting noise, it offers a clearer picture.

Does Not Reflect Cash Flow

For best results, the adjusted EBITDA formula helps review the firm for mergers and acquisitions as it states positive or negative cash flow. It deletes numerous irregular, non-recurrent, and one-time elements from earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA removes the cost of goods sold from the final calculation. Above all else, EBITDA’s importance is now as the standout formula and language applied by professional buyers, private equity investors and more when discussing business value.

What other metrics are similar to EBITDA?

In contrast, the formula to calculate EBITDA can start with net income, from which taxes, interest expense, depreciation, and amortization are added back. EBITDA serves as an invaluable tool in the financial landscape, offering a robust measure of operational profitability. EBITDA allows benchmarking by enabling comparisons between companies in different industries or with different financial structures.

Other common measures of profitability, such as net income, don’t always tell the whole story of a company’s finances. EBITDA allows you to more easily compare companies across various market sectors, without worrying about some of the intangibles that can skew profit Retained Earnings on Balance Sheet numbers. It provides a consistent way to evaluate profitability across industries and is widely used in business valuation. However, it should be analyzed alongside other metrics to get a comprehensive financial picture. The EBITDA margin shows how much operating expenses are eating into a company’s gross profit. In the end, the higher the EBITDA margin, the less risky a company is considered financially.

Startups, especially those that require heavy upfront investment to realize future growth, what is ebitda are likely to use EBITDA for good reasons. EBITDA is also effective for comparing a business against competitors, industry trends and macroeconomic trends. But if a struggling business suddenly starts relying on EBITDA when it never has before, the formula is likely not being used appropriately.