Glossary · UK
What is EBITDA?
Earnings Before Interest, Tax, Depreciation and Amortisation — a measure of a company's underlying operating profitability before financing structure, tax jurisdiction and accounting policy choices are factored in.
Full Definition
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation, and is widely used to assess a company's underlying operating performance by stripping out costs that reflect how the business is financed (interest), where it is taxed (corporation tax), and accounting choices about how quickly assets are written off (depreciation of tangible assets and amortisation of intangible assets such as goodwill) rather than how well the core operations are actually trading. It is calculated by starting from net profit and adding back interest, tax, depreciation and amortisation, or equivalently by taking operating profit and adding back depreciation and amortisation. Lenders, buyers and investors commonly use EBITDA as a proxy for cash-generating potential when comparing companies with different capital structures, debt levels or tax positions, and it features heavily in business valuation multiples (for example, a business might be valued at "5x EBITDA") and in loan covenants that test a company's ability to service its debt. EBITDA is not a substitute for actual cash flow, however, since it ignores capital expenditure, movements in working capital and the real cash cost of servicing debt, and because it is not a UK GAAP or IFRS-defined figure, companies can calculate it inconsistently, so investors typically also check operating cash flow and free cash flow before relying on it.