What Is EBITDA?

I was asked yesterday what “EBITDA” was and why it was relevant… this is one for the company owners, finance departments or those looking to start their own business.

If you ever want to borrow money for your business or pitch to investors, you will hear the term. Banks and investors use it to judge performance. 

It ensures we’re all singing the same tune when presenting our figures.

What Is EBITDA?
EBITDA stands for:

• Earnings
• Before
• Interest
• Taxes
• Depreciation (depreciation is a method that measures how the value of a company’s physical assets decrease over time.)
• Amortisation (amortization is used to periodically reduce the book value of a loan or intangible asset across a set period.)

It shows how profitable your business is before considering certain costs.

You calculate EBITDA by adding operating profit to depreciation and amortisation.

Who Uses It?

• Banks
• Investors
• Potential buyers

They use it to compare businesses. Why? It removes variables like tax rates or debt levels.

What’s a “Good” EBITDA Margin?

EBITDA margin is expressed as a percentage.

The formula is simple:

(EBITDA ÷ Revenue) × 100 = EBITDA Margin

A margin over 10% is generally positive. But context matters.

• In retail, 5-10% is strong.
• In software, over 20% is common.

Always compare within your industry.

Why Does It Matter?

• It’s a benchmark.
  Banks use it to judge if you can repay loans.
• It shows trends.
  Growth in EBITDA can attract investors. Declines may cause concern.
• It’s neutral.
  It ignores factors like tax strategy or asset depreciation.

Common Challenges

• Understanding the limitations.
  EBITDA doesn’t show cash flow. A high EBITDA doesn’t mean you can pay your bills.
• Overemphasis on growth.
  Growth isn’t enough. Focus on margins too.
• Ignoring other metrics.
  Look at cash flow, net profit, and debt levels as well.

Practical Tips

• Learn the basics of financial statements.
• Compare your EBITDA margin to your industry’s average.
• Use EBITDA trends to inform decisions.
• Don’t rely on one metric. Use it as part of a bigger picture.
• Speak to a professional if unsure.

What’s Next for You?

Are you confident in explaining your business performance? Could your team benefit from deeper financial insight?

EBITDA is just one piece of the puzzle. Knowing how to interpret it is another.

Would you like to learn more?