What is EBITDA?

There are a whole host of numbers to keep an eye on when you run a business. Revenue, profit, overheads - the list never really ends. But one metric that business owners can be less familiar with is EBITDA. You might have seen it mentioned by your accountant, spotted it in a lender's assessment or heard it mentioned in a meeting. 

Here’s what you need to know about EBITDA.

What does EBITDA stand for?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation (we’ll break down the meanings of each of these in the next section.). 

Strip those away and what you're left with is a clearer picture of your core business performance so you can see how much money your operations are actually generating, independently of how you're financed or structured.

It's a useful snapshot, widely used by lenders, investors and business owners to compare performance across different companies and sectors, without the noise that accounting choices or tax structures can introduce.

Calculating your EBITDA

The EBITDA formula doesn’t need to feel overly complicated. There are actually two ways to work it out:

EBITDA = Net profit + Interest + Taxes + Depreciation + Amortisation

Or, starting from operating profit:

EBITDA = Operating profit (EBIT) + Depreciation + Amortisation

Let's break down what each element means in practice, so you can understand the calculation taking place.

Earnings

This is your net profit - what's left after all costs have been taken out. It's the starting point for the calculation.

Interest

The cost of any debt you're carrying. Adding this back in removes the effect of how your business is financed, making comparisons more meaningful.

Taxes

Corporation tax and any other business taxes. Again, these vary depending on your structure and circumstances, so removing them gives a more level playing field.

Depreciation and amortisation

Depreciation covers the gradual loss of value in physical assets like vehicles, machinery and equipment. Amortisation does the same for intangible assets like patents or software licences. Both are accounting adjustments rather than cash leaving your business, which is why EBITDA strips them out.

Things to remember with EBITDA

EBITDA is a helpful tool, but it's not the full story. Here's what to keep in mind:

• It doesn't reflect cash flow. A business can have strong EBITDA and still face cash flow problems if payments are slow coming in or costs are front-loaded.

• It ignores capital expenditure. If your business is asset-heavy and needs regular investment in equipment or infrastructure, EBITDA alone won't capture that pressure.

• It's most useful in context. Compare it against previous periods, industry benchmarks or similar businesses to get the most value from it.

For small business owners, EBITDA is one of several metrics worth tracking - alongside cash flow and working capital - to get a full picture of your financial health. If you're looking at finance options to support growth or manage cash flow, our resources hub has more on managing cash flow and how a business loan might help to reduce costs

EBITDA FAQs

What is a good EBITDA?

There's no universal answer here as it depends on your industry. What looks healthy in retail might look very different in manufacturing or professional services.

However, a positive EBITDA is generally a good sign. It means your core operations are generating value before the effect of financing and accounting decisions. A negative EBITDA suggests the business isn't covering its operational costs, which is worth addressing quickly.

EBITDA margins (EBITDA as a percentage of revenue) are often more useful than raw figures. Many lenders and investors use these to assess efficiency and compare performance across similar businesses. A margin of 10–20% is usually considered solid for many SMEs, though this varies widely.

What is adjusted EBITDA?

Adjusted EBITDA goes a step further, removing one-off or unusual items from the calculation. This could be things like a one-time legal settlement, redundancy costs or a one-off equipment write-off. The aim is to reflect the ongoing, underlying performance of the business, rather than letting unusual events distort the picture.

It's commonly used in business valuations and when applying for significant finance, so lenders can assess what the business normally looks like rather than a snapshot that might include exceptional circumstances.

Variations of EBITDA

There are some types of EBITDA that are used in specific industries or situations. Here’s an overview of the different types of EBITDA:

• EBIT keeps depreciation and amortisation in, for businesses where those are real costs. 

• EBITA only adds back amortisation, often used where mergers and acquisition (M&A) activity distorts comparisons. 

• EBITDAX also strips out exploration costs, used in oil and gas. 

• EBITDAR adds back rent, common in airlines, hotels and retail. 

If you're exploring finance options for your business, explore our finance products at Funding CIrcle.

07/05/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.