EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortisation, a measure of operating profitability.

EBITDA strips out financing decisions, tax environments, and accounting choices to show the core operating profitability of a business. It's widely used as a basis for business valuation multiples, especially in M&A transactions. A healthy EBITDA margin indicates the business generates strong cash from operations before capital structure considerations.

When to use EBITDA

EBITDA is the right metric when you want to compare operating performance across businesses with different debt structures, tax jurisdictions, or fixed-asset bases. It is the standard starting point for valuation multiples in M&A, the input for most lender debt-service covenants, and the metric private equity buyers focus on when underwriting a deal. For owner-operated SMEs, an "Adjusted EBITDA" is usually presented at sale, adding back owner-specific expenses (above-market salary, personal vehicles, one-off legal costs) to show the earnings available to a new buyer.

Common pitfalls

EBITDA ignores capital expenditure entirely, which is dangerous for asset-heavy businesses (manufacturing, hospitality, fleet operators) where genuine cash profitability requires reinvestment. It also masks working-capital pressure, a business can grow EBITDA while its cash position deteriorates because debtor and inventory days are stretching. Always read EBITDA alongside Free Cash Flow and the Cash Conversion Cycle.

Industry benchmarks

EBITDA margin varies enormously by industry: software businesses routinely achieve 25-40%, professional services 15-25%, healthcare practices 18-30%, manufacturing 8-15%, e-commerce 5-12%, and hospitality 8-15%. A "good" EBITDA margin always needs the industry context, which is why Advisorli benchmarks every business against its category peers rather than a generic threshold.

How Advisorli calculates EBITDA

Advisorli pulls the line items directly from your connected accounting source (Xero, QuickBooks, MYOB, Sage, Reckon, or NetSuite) and builds EBITDA from net profit upward, re-adding interest, tax, depreciation, and amortisation. Subtotal rows are excluded to avoid double counting, and signs are normalised across sources so the number matches what your accountant prepares.

Formula

Example

A business with $500K net profit, $50K interest, $100K taxes, and $80K D&A has an EBITDA of $730K.

Related Terms

Industries where EBITDA matters most

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