What EBITDA hides
Lesson 2 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: Kettle & Co's EBITDA is £80,000. This year it must spend £35,000 replacing machines, pay £8,000 interest, £9,000 tax, and £6,000 more cash gets tied up in stock. How much cash is actually left?
Two cafés each have EBITDA of £80,000. Café A owes nothing. Café B has a big loan costing £50,000 a year in interest. Which statement is right?
Quick facts
- A genuine one-off legal bill from a lease dispute that won't happen again → Fair add-back. Truly one-off costs are a reasonable adjustment, if they really are one-off.
- £60,000 of 'one-off' marketing that he spends every single year → Sus add-back. If it happens every year, it's a normal cost. Calling it one-off is a magic trick.
- His own £30,000 salary, because 'founders don't really count' → Sus add-back. Someone has to do the job. If Dex left, the business would pay a replacement.
- The cost of a launch party he says was 'basically marketing' → Sus add-back. Spending is spending. Renaming it doesn't make it disappear.
- Redundancy costs from closing one shop for good → Fair add-back. A real one-off restructuring cost can be a fair adjustment, as long as it's explained.
- Fact: “Equipment wearing out is a real cost even though EBITDA leaves it out.” — Machines, ovens and vans have to be replaced eventually, with real cash.
- Myth: “Adjusted EBITDA always follows strict official rules.” — Companies choose their own adjustments. Always read what was added back and ask if it'll happen again.
- Fact: “A growing business can need more cash just to fund extra stock and unpaid invoices.” — That's working capital. Growth often eats cash before it makes any.