EBITDA: what it is
Lesson 1 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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The story so far
Dex: My startup has incredible EBITDA, bro. I don't know what the letters stand for, but it sounds expensive.
Nana: Earnings Before Interest, Tax, Depreciation and Amortisation. Five words, Dex. You've said 'disruptive' more times than that today.
Chip: Start with operating profit, then add back depreciation and amortisation. That's EBITDA: a rough look at what the day-to-day trading earns before financing, tax and the cost of wearing out kit.
Chip: EBITDA is a lens, not a bank balance. Useful for comparing, useless for paying the rent.
Questions you'll answer
Illustration: Kettle & Co has operating profit of £50,000, depreciation of £25,000 and amortisation of £5,000. What's its EBITDA?
£50,000 + £25,000 + £5,000 = £80,000. EBITDA is operating profit with depreciation and amortisation added back.
Why do people like looking at EBITDA when comparing businesses?
It compares trading before loans, tax and kit costs. That's the idea. Two cafés with different loans and tax bills can be compared on how the trading itself performs.
Quick facts
- Coffee beans, milk and cups → Taken off before EBITDA. Cost of sales is a real trading cost, so it comes off first.
- Baristas' wages → Taken off before EBITDA. Staff costs are day-to-day running costs.
- Rent on the cafés → Taken off before EBITDA. Rent is an operating cost.
- Interest on the bank loan → Left out of EBITDA. The I: financing costs are left out.
- Corporation Tax → Left out of EBITDA. The T: tax is left out.
- Wear and tear on the espresso machines → Left out of EBITDA. The D: depreciation is added back.
- Fact: “EBITDA is operating profit with depreciation and amortisation added back.” — That's the usual way to calculate it from a P&L.
- Myth: “EBITDA is a legally defined figure every company must report.” — It isn't a required statutory figure. Companies choose how to present it, which is why you check how it was worked out.
- Fact: “A business can have positive EBITDA and still run out of cash.” — Loan repayments, new equipment and tax all come after EBITDA.