Question 1

What is EBITDA and why is it important?

Accepted Answer

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's core operating profitability by stripping out the effects of financing, tax, and accounting decisions. It is widely used in business valuation, M&A, and comparing companies across different tax jurisdictions or capital structures.

Question 2

What is a good EBITDA margin?

Accepted Answer

EBITDA margins vary significantly by industry. Software/SaaS companies often achieve 25-40%+, manufacturing typically sees 10-20%, retail 5-15%, and restaurants 15-25%. An EBITDA margin above 25% is generally considered strong regardless of industry, while below 10% suggests operational efficiency issues.

Question 3

How is EBITDA different from net income?

Accepted Answer

Net income is the bottom line after all expenses including interest, taxes, depreciation, and amortization. EBITDA adds these back to show operating profitability before financing and accounting decisions. Two identical businesses with different debt levels or depreciation schedules would have different net incomes but similar EBITDA.

Question 4

What is EBITDA used for in business valuation?

Accepted Answer

EBITDA is commonly used with the EV/EBITDA multiple for valuation. Typical multiples range from 5-15x depending on industry and growth. A business with $500K EBITDA in an industry trading at 8x would be valued around $4 million enterprise value. Private equity and M&A transactions frequently use EBITDA as the primary valuation metric.

Question 5

What are the limitations of EBITDA?

Accepted Answer

EBITDA ignores capital expenditures (capex) needed to maintain the business, changes in working capital, and debt repayment obligations. A company with high EBITDA but massive capex requirements may have little free cash flow. Warren Buffett has criticized EBITDA for this reason — always look at free cash flow alongside EBITDA.

Question 6

What is the difference between EBITDA and EBIT?

Accepted Answer

EBIT (Earnings Before Interest and Taxes) does not add back depreciation and amortization, so it reflects the wear and tear on physical assets. EBITDA adds D&A back to show cash-like operating earnings. EBIT is more conservative and better reflects ongoing capital requirements, while EBITDA is better for comparing asset-light vs. asset-heavy businesses.

Question 7

What is adjusted EBITDA?

Accepted Answer

Adjusted EBITDA further removes one-time or non-recurring items like restructuring charges, legal settlements, stock-based compensation, or one-off gains/losses. This aims to show "normalized" operating performance. Be cautious — companies sometimes aggressively adjust EBITDA to paint a rosier picture than reality.

EBITDA Calculator — Calculate EBITDA from Financials