EBITDA is a measure of a company’s operating profit before deducting interest, taxes, depreciation and amortisation. It provides an indication of profit from normal business activities. The abbreviation stands for Earnings Before Interest, Taxes, Depreciation and Amortisation.
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EBITDA shows how much money a company earns from its core activities.
By excluding interest, taxes and depreciation, it becomes clearer how profitable the day to day business model is. It makes it easier to compare companies, especially when they have different financing structures or tax regimes. However, EBITDA does not show the full picture, because costs such as interest and depreciation ultimately still have to be paid. For this reason, this measure is often used as an additional indicator alongside net profit.
Short example:
Suppose a company has €1,000,000 in revenue and €700,000 in operating costs. The operating profit is then €300,000.
From that €300,000, the company still has to pay €50,000 in interest, €40,000 in taxes and €60,000 in depreciation. The net profit then remains €150,000. The EBITDA in this example is €300,000, because interest, taxes and depreciation are not included.
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