EBITDA is an acronym for "Earnings Before Interest, Taxes, Depreciation, and Amortization". It's a financial metric similar to EBIT, but EBITDA goes a step further by removing depreciation and amortization from company earnings.

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In other words, it's simply your business performance/operational profitability - without the noise. We can also say: Remove finance, tax and accounting techniques - and see the real performance of your business. Think: profit before the complicated.

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It's important to calculate EBITDA correctly and measure health daily:

• EBITDA margin = EBITDA/revenue
• Interest coverage = EBITDA/interest
• Debt service = EBITDA/(principal + interest)
• Fixed cost recovery = EBITDA/fixed liabilities

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What is EBITDA used for?

EBITDA is primarily used when a company wants to compare itself with other similar companies. It is an expression that shows the profitability of a company and it works because:

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EBITDA is also used in other contexts such as:

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The typical mistakes

Based on our experience, we see 3 mistakes that are typically made

‍1. using the wrong formula

• Choose a method based on data, not what's easiest.
• Bottom-up works best if your accounts are clean.
• Top-down is best suited for quick analysis.

2. Lack of crucial adjustments

• One-off or unusual events must be excluded.
• Non-recurring expenses must be identified.
• Rent vs. buy decisions need to be normalized.

3. Ignoring the industry context

• Know your industry
• Your margin is neither "good" nor "bad" until you compare it to your industry.
• Follow trends over time

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Your EBITDA success model

1. Always check cash flow

• EBITDA is not money - and money is still king.

2. Know your adjustments

• Clean data leads to better decisions.

3. Follow working capital

• Because EBITDA doesn't show the whole picture.

Remember: The goal is not to have the highest EBITDA.
It's to understand what your EBITDA is telling you.