What is EBITDA? Formula, margin and pitfalls

What EBITDA means

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is profit with financing costs, income tax and the non-cash charges for using up long-term assets added back, and it is used as a rough measure of the cash-generating ability of a company's operations. It matters because lenders, buyers and investors use it to compare businesses and set debt limits and valuations.

EBITDA is not defined by IFRS. No standard tells a company how to calculate it, which is why two companies' EBITDA figures are only comparable after reading how each was built. It is most useful as an analytical measure: useful for comparing operating performance across companies with different capital structures, tax positions and asset ages, and dangerous when treated as cash or as profit.

The EBITDA formula, two ways

There are two routes to the same figure. Top-down, start with operating profit and add back depreciation and amortisation charged within it. Bottom-up, start with net profit and add back income tax, net interest, depreciation and amortisation. Both must give the same answer; if they do not, something has been added back twice or missed.

• EBITDA = operating profit + depreciation + amortisation
• EBITDA = net profit + income tax expense + interest expense - interest income + depreciation + amortisation
• EBIT = net profit + income tax expense + net interest expense
• EBITDA margin = EBITDA divided by revenue
• Impairment losses are usually added back as well, in which case some analysts call the measure EBITDA before impairment or simply state the definition used.

A worked example in EUR

A distribution company reports the following for the year. Revenue EUR 2,000,000. Cost of sales, excluding depreciation, EUR 1,100,000, giving gross profit of EUR 900,000. Operating expenses for staff, rent, marketing and administration EUR 420,000. Depreciation EUR 120,000 and amortisation of software EUR 30,000. Operating profit is 900,000 minus 420,000 minus 120,000 minus 30,000, which is EUR 330,000. Interest expense is EUR 60,000, so profit before tax is EUR 270,000. Income tax at 25 percent is EUR 67,500, leaving net profit of EUR 202,500.

Top-down, EBITDA is operating profit of 330,000 plus depreciation of 120,000 plus amortisation of 30,000, which is EUR 480,000. Bottom-up, net profit of 202,500 plus tax of 67,500 plus interest of 60,000 plus depreciation and amortisation of 150,000 also gives EUR 480,000, so the two routes agree.

• EBITDA: 480,000, a margin of 24.0 percent on revenue of 2,000,000
• EBIT (operating profit here): 330,000, a margin of 16.5 percent
• Profit before tax: 270,000, a margin of 13.5 percent
• Net profit: 202,500, a margin of about 10.1 percent
• Interest cover on EBITDA: 480,000 divided by 60,000 = 8.0 times
• Net debt of 1,200,000 divided by EBITDA of 480,000 = 2.5 times

EBITDA vs EBIT vs operating profit

EBIT, earnings before interest and taxes, keeps depreciation and amortisation as costs. That makes it a better measure for capital-intensive businesses, because assets do wear out and must be replaced. Two companies with the same EBITDA can have very different EBIT if one runs new, expensive machinery and the other old, fully depreciated equipment.

Operating profit is often used as a synonym for EBIT, but they are not always equal. EBIT as calculated by analysts usually includes all income before interest and tax, such as dividends received or the share of profit of associates. Under IFRS 18 Presentation and Disclosure in Financial Statements, operating profit is a defined subtotal that excludes income and expenses classified in the investing and financing categories, so income from investments sits below operating profit. When a covenant or valuation says EBIT or EBITDA, read which starting point it uses.

Adjusted EBITDA and its pitfalls

Adjusted EBITDA removes items management considers not representative of ongoing performance. In the example, adding back restructuring costs of EUR 40,000 and share-based payment expense of EUR 25,000 lifts EBITDA from EUR 480,000 to EUR 545,000, and the margin from 24.0 to 27.25 percent. A 2.5 times leverage ratio on reported EBITDA becomes about 2.2 times on adjusted EBITDA (1,200,000 divided by 545,000), which can decide whether a covenant is met.

Adjustments are legitimate when they are genuinely unusual, consistently applied and clearly explained. They are a warning sign in the cases below, which lenders and due diligence teams look for first.

• One-off costs that appear every year, such as annual restructuring or recurring legal settlements.
• Add-backs for cost savings or synergies that have not happened yet.
• Share-based payment treated as non-cash and ignored, although it is a real cost to shareholders.
• Costs capitalised into assets, which moves them below EBITDA into depreciation and amortisation.
• Only removing losses: one-off gains, such as a profit on selling a building, left in.
• A definition that changes from year to year without a reconciliation.

How IFRS 16 leases change EBITDA

IFRS 16 Leases, effective since 2019, requires lessees to recognise most leases on the balance sheet as a right-of-use asset and a lease liability. The lease payment no longer appears as rent in operating expenses. Instead the income statement shows depreciation of the right-of-use asset and interest on the lease liability, both of which are excluded from EBITDA.

Illustration: suppose the EUR 420,000 of operating expenses in the example included EUR 100,000 of office and warehouse rent that falls within IFRS 16, and that in year one the right-of-use asset depreciates by EUR 90,000 and lease interest is EUR 15,000. EBITDA rises by the full EUR 100,000 to EUR 580,000. EBIT rises by only EUR 10,000 (100,000 of rent removed, 90,000 of depreciation added). Profit before tax falls by EUR 5,000 in that year, because depreciation plus interest of 105,000 exceeds the 100,000 rent. Cash paid is unchanged.

Short-term leases and leases of low-value assets can still be expensed if the lessee elects the exemptions, so those costs stay inside EBITDA. Lenders often define covenant EBITDA on a pre-IFRS 16 basis or add lease liabilities to net debt; check which. US GAAP (ASC 842) keeps a single straight-line lease cost for operating leases, so EBITDA of an IFRS reporter and a US GAAP reporter with identical leases will differ.

EBITDA under IFRS 18 from 2027

IFRS 18, issued by the IASB in April 2024 to replace IAS 1, is effective for annual reporting periods beginning on or after 1 January 2027, with earlier application permitted (as of September 2026). It introduces required subtotals in the statement of profit or loss, including operating profit and profit before financing and income taxes, and new disclosure rules for management-defined performance measures (MPMs).

An MPM is a subtotal of income and expenses that a company uses in public communications outside the financial statements to communicate management's view of performance and that IFRS does not require or specifically exempt. IFRS 18 para 118 lists subtotals that are not MPMs, including operating profit or loss before depreciation, amortisation and impairments within the scope of IAS 36. A company that presents exactly that subtotal therefore has no MPM disclosure for it. Adjusted EBITDA, by contrast, is typically an MPM.

For each MPM, IFRS 18 requires disclosure in a single note: a reconciliation to the most directly comparable IFRS subtotal, the income tax and non-controlling interest effects of each reconciling item, an explanation of why the measure is useful and how it is calculated, and an explanation of any change. Because the note sits inside the financial statements, it is within the scope of the audit. Listed companies already face rules on alternative performance measures outside the financial statements, including the ESMA Guidelines on Alternative Performance Measures in the EU and National Instrument 52-112 in Canada.

EBITDA is not cash flow

EBITDA ignores four things that consume cash: capital expenditure, increases in working capital, tax paid and interest paid. A business can report rising EBITDA while its bank balance falls, especially when it is growing fast and funding more receivables and inventory.

Continuing the example, assume capital expenditure of EUR 200,000, an increase in working capital of EUR 50,000, tax paid of EUR 60,000 and interest paid of EUR 60,000. Starting from EBITDA of EUR 480,000, cash left after these items is EUR 110,000. That is less than a quarter of EBITDA. Our guide on the cash flow statement using the indirect method shows how to reconcile profit to cash properly.

• EBITDA: 480,000
• Less capital expenditure: 200,000, leaving 280,000
• Less increase in working capital: 50,000, leaving 230,000
• Less tax paid: 60,000, leaving 170,000
• Less interest paid: 60,000, leaving 110,000 of free cash flow

When EBITDA is useful and when it misleads

EBITDA works well for comparing businesses in the same industry with different financing and tax structures, as a starting point for valuation multiples such as enterprise value to EBITDA, and for loan covenants when the definition is written precisely. It misleads for capital-intensive businesses whose assets must be replaced, for fast-growing businesses whose working capital absorbs cash, and for any company where the adjustments have grown larger than the reported figure.

In valuation, EBITDA multiples price the whole business, debt included. Illustration with an assumed multiple: if comparable companies trade at 6 times EBITDA, the example company's enterprise value is 6 multiplied by 480,000, which is EUR 2,880,000. Deducting net debt of EUR 1,200,000 leaves an equity value of EUR 1,680,000. The same arithmetic shows why adjustments matter: at 6 times, each EUR 10,000 added to EBITDA adds EUR 60,000 to the price, so buyers test every add-back.

A practical test: if you would not accept a company's adjusted EBITDA without the reconciliation from operating profit, do not publish your own without it.

Getting EBITDA from Skyline Nexus ERP

In Skyline Nexus ERP the general ledger reports under Fiscal Authority, Reports include an EBIT & EBITDA Report alongside the Income Statement. The Income Statement shows Revenue, Cost of Goods Sold, Gross Profit, Operating Expenses, Operating Income, Other Income, Other Expenses and Net Income with a percentage of revenue column, and can be compared with the previous period or previous year and filtered by project or branch.

Where an account lands on the income statement is set by its account type's P&L Category (Cost of Goods Sold, Operating Expense, Other or Financial Expense). For a clean EBITDA, keep depreciation, amortisation and interest in their own accounts rather than mixing them into general expense accounts, and reconcile any EBITDA figure you publish back to the Operating Income line.