EBITDA Explained: What It Is, Why Investors Use It, and How to Calculate It

What EBITDA is and why investors use it#

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It is calculated from operating profit by adding back depreciation and amortisation charges. Investors use EBITDA because it provides a cleaner measure of operational performance than net profit — removing the effects of financing decisions (interest depends on how much debt you carry), tax regimes (which vary by jurisdiction), and accounting conventions (depreciation schedules are somewhat arbitrary). It allows comparison across businesses regardless of their capital structure.

The EBITDA calculation#

EBITDA = Revenue − COGS − Operating Expenses + Depreciation + Amortisation. Or from net profit: EBITDA = Net Profit + Interest + Tax + Depreciation + Amortisation. Example: Revenue £2,000,000 minus COGS £800,000 minus operating expenses £700,000 = Operating profit £500,000. Add back depreciation £80,000 and amortisation £20,000 = EBITDA £600,000. EBITDA margin = £600,000 / £2,000,000 = 30%.

EBITDA margin benchmarks#

Technology and SaaS: 20-40% for mature businesses. Retail: 5-15%. Professional services: 15-30%. Manufacturing: 10-20%. Healthcare: 10-25%. A higher EBITDA margin indicates more operational efficiency — more of each pound of revenue converts to operational earnings. The trend over time is as important as the absolute level: a rising EBITDA margin demonstrates improving operational leverage.

EBITDA as a valuation metric#

EBITDA is the most commonly used basis for private company valuations. Enterprise value is typically expressed as a multiple of EBITDA — the EV/EBITDA multiple. For SMEs this typically ranges from 3x-8x depending on sector, growth rate, customer concentration, and management depth. A business generating £600,000 EBITDA valued at 5x would be worth £3,000,000 in an M&A transaction. Understanding your EBITDA and the relevant sector multiple gives you a realistic picture of what your business is worth today.

EBITDA vs EBIT vs net profit#

Use EBITDA when comparing operational performance across businesses with different capital structures, or when discussing valuation. Use EBIT (EBITDA minus depreciation and amortisation) when including the economic cost of asset consumption. Use net profit for tax and statutory reporting. Use cash flow for liquidity management — a business with healthy EBITDA can still have negative cash flow if capital expenditure or working capital is consuming cash faster than operations generate it.