EBITDA stands for earnings before interest, taxes, depreciation and amortization. It measures the profit your operations generate before financing costs and accounting write-downs. Start with revenue, subtract COGS and operating expenses, then add back depreciation and amortization. Investors use it to compare companies with different debt levels and asset bases.
EBITDA is popular because it removes things that differ between companies for reasons unrelated to the operating business: how much debt they carry, which tax rules apply, and how quickly they write down their assets.
Worked example. Revenue is 900,000 euros. COGS is 360,000 euros, so gross profit is 540,000 euros. Operating expenses of 420,000 euros leave 120,000 euros. Depreciation on machines is 45,000 euros, so EBIT is 75,000 euros. EBITDA is EBIT plus depreciation: 75,000 plus 45,000 equals 120,000 euros. When depreciation is your only non-cash item, EBITDA simply equals gross profit minus operating expenses.
Two things to keep in mind. EBITDA is not cash flow, even though people often talk about it that way. It ignores what you spend on new equipment, how much cash sits in inventory, and whether customers pay on time. A company can report 120,000 euros of EBITDA and still run out of money because it spent 200,000 euros on machines in the same year.
EBITDA also flatters asset-heavy businesses. If your model needs a new 60,000 euro machine every three years, that cost is real, and depreciation is how the accounts record it. Taking it out makes the business look more profitable than it is. A software company with almost no fixed assets has EBITDA and EBIT close together, so there the distinction matters less.
EBITDA appears as a line in the Foundor financial plan, and it is one of the first figures a bank or investor looks for.
