What Is EBITDA? a Plain-English Guide for Business Owners

EBITDA is your business’s earnings before interest, taxes, depreciation, and amortization — a way of looking at profit that strips out financing decisions, tax situations, and accounting conventions so the underlying operation can be compared on its own terms. If a lender, buyer, or investor has ever asked for “your EBITDA,” this is what they wanted: a view of how much cash-generating capacity the business itself has, before the effects of how it happens to be financed and taxed.

The formula, in plain English

Start with net income from your profit-and-loss statement, then add back four things:

1. Interest — what you pay on loans and lines of credit. Two identical businesses can carry very different debt; adding interest back lets you compare the operations rather than the balance sheets.
2. Taxes — income tax expense. Tax bills depend on entity type, state, and history, not on how well the business runs.
3. Depreciation — the non-cash expense that spreads an asset’s cost over its useful life. The truck was paid for years ago; depreciation is an accounting echo, not money leaving this year.
4. Amortization — the same idea applied to intangible assets, like purchased software or acquired customer lists.

So: EBITDA = Net income + Interest + Taxes + Depreciation + Amortization. Every number comes straight off financial statements you already have — which also means EBITDA is only as trustworthy as the books it comes from.

A worked example

Take an illustrative service business with the following year on its P&L:

Net income	$120,000
Interest on the equipment loan	$18,000
Income taxes	$32,000
Depreciation (vehicles & equipment)	$25,000
Amortization	$5,000
EBITDA	$200,000

Same company, two very different-looking numbers. Neither is “the truth” — they answer different questions. Net income answers what did the owners keep after everything? EBITDA answers what does the operation produce before financing and accounting effects?

Why lenders and buyers reach for it

A lender sizing a loan wants to know whether the operation throws off enough to cover payments — so they look at earnings before the interest the new loan would replace or add to. A buyer comparing three businesses wants to ignore the fact that one seller runs debt-free, one leases everything, and one financed a building; EBITDA puts them on comparable footing. That is also why small-business sale prices are often discussed as a multiple of EBITDA (or of seller’s discretionary earnings, its close cousin for owner-operated companies).

What EBITDA hides — and it hides real things

• Equipment reality. Depreciation is non-cash, but trucks and machines genuinely wear out. A business that must replace $40k of equipment a year is less valuable than its EBITDA twin that doesn’t.
• Working capital. EBITDA says nothing about cash tied up in receivables and inventory while payroll comes due — the classic profitable-but-cash-poor trap.
• Debt is still real. Adding interest back doesn’t make the loan payment optional.

Sophisticated readers of your financials know all this — which is why they’ll ask follow-up questions about capital expenditure, aging, and owner compensation right after they ask for EBITDA. Having clean answers ready is where the real credibility comes from.

Calculate yours

Our free EBITDA Calculator walks through the add-backs from your P&L in about two minutes. It’s an educational estimate, not a determination — and if the inputs are coming from books that haven’t been reconciled in months, fix that first: monthly bookkeeping or a cleanup project is what makes any of these numbers mean something.