From the finance director's chair
What is EBITDA? The boardroom's favorite number, explained
Every finance meeting mentions it. Few people outside finance could explain it. Here's EBITDA in plain English, and why you shouldn't trust it on its own.
- EBITDA is profit before interest, tax, depreciation and amortization: roughly, what the day-to-day business earns.
- Boards love it because it compares companies with different loans, tax bills and asset ages.
- It ignores investment and cash stuck in the business, and "adjusted" versions can leave out even more. Never read it alone.
The name, decoded
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. Strip out the jargon and it answers one question: if we ignore how the company is financed, taxed and how old its equipment is, does running the business make money?
Think of it like judging a restaurant by what's left after food, staff and rent, before the owner pays the mortgage on the building. Useful for judging the kitchen. Not the whole story about the owner's finances.
Quick math: finding EBITDA on a P&L
Take Halvard Coffee Systems, the fictional company we use in our courses. In 2024 it sold $39.0m. After the cost of making those machines, it kept $15.15m of gross profit. Then it spent $8.6m running the business: salaries, rent, marketing, travel. (That $8.6m doesn't include depreciation, which comes next. Count it once, not twice.)
$15.15m − $8.6m = $6.55m of EBITDA. Take off $1.3m of depreciation (the wear and tear on its equipment) and you get $5.25m of operating profit. After interest and tax, $3.65m is left as net profit.
Why the boardroom loves it
It's comparable. Two companies can run identical businesses, but one has a big loan and the other doesn't. EBITDA puts them side by side before the financing decisions kick in.
It's the basis of a lot of deals. Companies are often valued as a multiple of EBITDA, and loan agreements often include a limit linked to it (for example, "net debt must stay below 3 times EBITDA"). That's why your CFO watches it so closely, and why your budget can get squeezed to protect it.
The three things EBITDA doesn't show
- Investment. A company can show great EBITDA while spending heavily on new machines, buildings or software. That cash is gone, but it never touches EBITDA.
- Cash stuck in the business. If customers pay late or the warehouse is full, EBITDA looks fine while the bank account empties. Halvard's operations produced no cash at all in 2024, despite $6.55m of EBITDA.
- "Adjusted" items. Plain EBITDA includes unusual costs. "Adjusted EBITDA" takes some of them out, and the company chooses which. Some adjustments are fair (a one-off legal settlement). Others are costs that somehow come back every year.
Why it matters to you
If your company runs on an EBITDA target, every cost in your budget is judged by how it moves that number. Operating costs (your team's travel, contractors, software subscriptions) hit EBITDA straight away, so in an EBITDA-driven company they're usually the first costs finance questions. More on that in capex vs opex.
When someone shows me EBITDA, my next question is always about cash. Strong EBITDA with weak operating cash flow means something is being tied up, usually in customers who haven't paid yet or stock nobody has sold.
"What's our EBITDA target this year, and which of my costs count against it?"