EBITDA — what it is and how to interpret it?

Quick Answer

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is profit before deducting interest, taxes, depreciation and amortization — calculated as net profit + interest + taxes + depreciation, or simply operating profit (EBIT) + depreciation. It shows how much a company earns from core operational activity, stripping out financing structure, tax system and depreciation policy so companies from different countries and industries can be compared. It also drives the popular EV/EBITDA valuation multiple and the EBITDA margin (EBITDA / revenue). Its limits: it ignores CAPEX and cash, so it is best analysed together with free cash flow and net profit.

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Definition

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is profit before deducting interest, taxes, depreciation and amortization. It shows how much company earns from core operational activity.

In Polish terms: operating profit increased by depreciation.

Formula

EBITDA = Net Profit + Interest + Taxes + Depreciation

or simpler:

EBITDA = Operating Profit (EBIT) + Depreciation

Example: Company has operating profit of 80 million PLN and depreciation of 20 million PLN.

EBITDA = 80 + 20 = 100 million PLN

What is EBITDA used for?

Comparing companies

EBITDA eliminates impact of:

• Financing structure (interest) — other company may have more debt
• Tax system (taxes) — different countries, different rates
• Depreciation policy — different depreciation methods distort profit

Thanks to this, EBITDA allows comparing operational profitability of companies from different countries and industries.

Company valuation (EV/EBITDA)

One of most popular valuation indicators:

EV/EBITDA = Enterprise Value / EBITDA

EBITDA limitations

EBITDA is not a perfect indicator:

• Ignores CAPEX — company may require huge capital expenditures that EBITDA doesn't account for
• Doesn't show cash — Free Cash Flow is for that
• Can be manipulated — companies can classify costs differently
• Warren Buffett warns: "Does management think the tooth fairy pays for capital expenditures?"

Therefore EBITDA is best analyzed together with FCF and net profit, not standalone.

EBITDA Margin

EBITDA Margin = EBITDA / Revenue × 100%

Shows company's operational efficiency:

• Technology/SaaS: 30–50%
• FMCG: 15–25%
• Retail: 5–10%
• Manufacturing: 10–20%

How Freenance can help

Freenance displays EBITDA and EV/EBITDA for public companies, helping quickly assess whether given company is expensive or cheap compared to competition.

👉 Analyze company indicators with Freenance — freenance.io

Related Articles

• Free Cash Flow (FCF) — wolne przepływy pieniężne
• Earnings Per Share (EPS) — zysk na akcję
• Price-to-Book (P/B) — wskaźnik cena/wartość księgowa
• Jak prowadzić JDG i inwestować — optymalizacja podatkowa dla przedsiębiorców

FAQ

What does EBITDA stand for?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It measures a company's operating profit before non-cash charges and capital-structure-related costs are deducted. The metric is widely used because it isolates the cash-generating power of core business operations.

How is EBITDA calculated?

There are two common approaches: starting from net profit, you add back interest, taxes, depreciation and amortization; alternatively, you take operating profit (EBIT) and simply add depreciation and amortization. Both methods should yield the same figure when applied to clean financial statements. The result is typically reported as a separate line in earnings presentations, although it is not a standard IFRS or GAAP metric.

Why do investors use EV/EBITDA for valuation?

EV/EBITDA compares a company's enterprise value (market cap plus net debt) to its operating cash-like earnings, making it useful for comparing firms with different capital structures or tax regimes. It is particularly popular in M&A analysis and across sectors with heavy capital expenditure such as telecom or industrials. A lower EV/EBITDA generally signals a cheaper valuation relative to peers, though context matters.

What are the main limitations of EBITDA?

EBITDA ignores capital expenditure, working capital changes and the real cost of debt — all of which can be substantial for capital-intensive businesses. Warren Buffett famously criticised it by asking whether management thinks the tooth fairy pays for capex. For a complete picture, EBITDA should be paired with free cash flow and net income.

Is a high EBITDA margin always good?

A high EBITDA margin signals strong operating efficiency, but the appropriate level varies by industry. Software companies routinely show 30–50% margins, while retail and manufacturing operate on much thinner margins of 5–20%. Comparing margins outside of peer groups can lead to misleading conclusions, so always benchmark within the same sector.