How It Works
Why EBITDA Matters
- Snapshots core earnings, stripping out financing choices and non-cash charges.
- Lenders use it to test covenant ratios.
- Buyers lean on it to set purchase multiples.
- Owners track it to judge everyday operating health.
EBITDA Equation—Step-by-Step
Start with
|
Net Income
|
+ Interest Expense
|
+ Income Taxes
|
+ Depreciation
|
+ Amortization
|
= EBITDA
|
EBITDA vs. EBIT vs. Net Income
| EBITDA | EBIT | Net Income | |
| Excludes Interest & Taxes | ✓ | ✓ | — |
| Excludes Depreciation & Amortization | ✓ | — | — |
| Shows after-tax bottom line | — | — | ✓ |
| Typical Use | Cash-flow proxy | Operating profit | Earnings for owners |
When analysts ask, “what does EBITDA tell me that EBIT can’t?”—the answer is cash-style comparability across asset-heavy and asset-light firms.
Industry Benchmarks (2025 Averages)*
How to Improve EBITDA
- Raise gross margin – Update pricing or switch to higher-yield products.
- Trim operating costs – Automate payroll, renegotiate leases.
- Reduce bad-debt write-offs – Tighten credit checks to lift revenue quality.
- Outsource non-core tasks – Lower overhead by using fractional CFO or bookkeeping services.
- Monitor monthly – Plug new figures into the EBITDA calculator to track gains.
Common Missteps
| Pitfall | Why It Skews Results | Fix |
| Counting one-time gains | Inflates metric | Strip out non-recurring items for Adjusted EBITDA. |
| Mixing GAAP & cash numbers | Double-counts expenses | Always pull figures from the same statement period. |
| Ignoring capital intensity | High EBITDA may still need heavy reinvestment | Compare alongside free cash flow and CapEx. |
Frequently Asked Questions
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