Definition
EBITDA approximates operating profit before interest, taxes, depreciation, and amortization. It is not the same as cash flow.
Formula
EBITDA = operating income + depreciation + amortization
Example
If operating profit is $2M and depreciation/amortization is $300k, EBITDA is about $2.3M.
How to use it
- EBITDA is useful for comparing operating performance across firms.
- It excludes capital intensity and working capital timing effects.
- Use EBITDA margin to compare profitability across different revenue scales.
- Pair EBITDA with cash flow to avoid overstating performance.
Common mistakes
- Treating EBITDA as cash flow (working capital and CapEx matter).
- Ignoring stock-based compensation and other non-cash costs when they are material.
- Using EBITDA without noting revenue recognition or capitalization policies.
Measured as
EBITDA = operating income + depreciation + amortization
Misused when
- Treating EBITDA as cash flow (working capital and CapEx matter).
- Ignoring stock-based compensation and other non-cash costs when they are material.
- Using EBITDA without noting revenue recognition or capitalization policies.
Operator takeaway
- EBITDA is useful for comparing operating performance across firms.
- It excludes capital intensity and working capital timing effects.
- Use EBITDA margin to compare profitability across different revenue scales.
- Tie EBITDA to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Valuation modeling hub: WACC, DCF, multiples, and equity value if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether EBITDA belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Valuation modeling hub: WACC, DCF, multiples, and equity value: A practical hub for valuation modeling: estimate a discount rate (WACC), run a simple DCF with sensitivity analysis, and translate enterprise value to equity value.