EBITDA: Definition, Formulas, and Examples

Understanding how profitable your small business truly is can be more complex than glancing at your net income. For small business owners, one financial metric often used to gauge operational performance and business value is EBITDA. This measure helps strip out factors that can distort profitability, offering a clearer view of how efficiently your company runs.

Use this blog to understand what EBITDA is, the associated formulas, and real-world examples that will help you get a better grasp on the profitability of your small business operations. 

Key Highlights

• EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, a common measure of a company’s operating performance.

• It helps owners assess their company's profitability by removing the effects of financing and accounting decisions.

• You can calculate EBITDA using two standard formulas, both easily derived from your income statement.

• EBITDA margin measures profitability as a percentage of revenue, allowing benchmarking across companies or periods.

• Though useful, EBITDA has limitations and shouldn’t be viewed as a substitute for cash flow or net income.

• Tracking and improving EBITDA can help increase business valuation and attract investors or lenders.

What is EBITDA?

Breaking Down the Acronym

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Each excluded component serves a reason:

• Interest reflects how your business is financed.

• Taxes vary based on location and structure.

• Depreciation and amortization are non-cash expenses tied to assets and intangible items.

By excluding these, it focuses on the pure operating profitability of your business, which is the profit generated solely from core operations.

The formula is straightforward:

EBITDA = Operating Income + Depreciation + Amortization.

It’s a non-generally accepted accounting principles (GAAP) measure, meaning it isn’t part of standard accounting rules, yet it’s widely used across industries to evaluate business performance consistency.

Why Small Business Owners Should Care

Small business owners often rely on cash flow and operating profit to inform their decision-making. EBITDA provides a consistent method for comparing financial performance, even when two businesses have different debt levels or tax situations.

Here’s why it matters:

• Clarity on operations: EBITDA isolates the earnings from normal operations without financing or tax effects.

• Investor and lender insight: Many lenders assess a company’s ability to service debt using the debt-to-EBITDA ratio.

• Business valuation: Potential buyers often use EBITDA multiples to estimate what your business is worth.

For business owners preparing for growth, securing loans, or considering a potential sale, understanding EBITDA is crucial.

How to Calculate EBITDA

The Two Common Formulas

There are two widely accepted EBITDA calculations:

1. EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

2. EBITDA = Operating Income (EBIT) + Depreciation + Amortization

Either EBITDA formula for small businesses arrives at the same result. The first starts from your bottom line (net income) and adds back certain items, while the second starts from operating income.

Step-by-Step Calculation Guide for Small Business Owners

To calculate EBITDA, you’ll need data from your income statement and cash flow statement:

1. Start with net income. This is your profit after all expenses.

2. Add back interest expense. This is found near the bottom of your income statement.

3. Add income taxes. Locate this tax near the bottom.

4. Add depreciation and amortization expenses. These may appear as separate lines or be listed in notes.

Common EBITDA mistakes to avoid:

• Don’t use gross revenue instead of operating income.

• Exclude one-time gains or expenses like lawsuit settlements or asset sales.

• Avoid using EBITDA as a proxy for cash flow. It doesn’t account for capital expenditures or changes in working capital.

If you use bookkeeping software or professional small business bookkeeping services, you can generate reports that include depreciation and other relevant data.

EBITDA Margin and Other Related Metrics

The EBITDA margin expresses EBITDA as a percentage of revenue:

EBITDA Margin = EBITDA ÷ Total Revenue

For example, if your business has $500,000 in revenue and $100,000 in EBITDA, your margin is 20%.

A higher EBITDA margin indicates more efficient operations and cost control. You can also track Adjusted EBITDA, which excludes one-time or non-recurring items to reflect “normalized” profitability.

Benchmarking EBITDA margins against others in your industry helps identify strengths and weaknesses over the course of time.

EBITDA Examples in Practice

Small Business Example (Fictional Scenario)

Let’s take BrightBakery LLC, a local bakery with the following annual results:

EBITDA = $50,000 + $5,000 + $10,000 + $8,000 + $2,000 = $75,000

EBITDA Margin = $75,000 ÷ $400,000 = 18.75%

This means BrightBakery’s operations generate approximately 19 cents of profit for every dollar in revenue, before considering financing and tax effects.

Real-World Example (Public Company)

Many large companies report adjusted EBITDA in their financial statements. For instance, in 2025, several publicly traded firms projected EBITDA in the billions as a benchmark for operational performance. Investors interpret strong or rising EBITDA as a sign of healthy operations and potential for growth.

What the Numbers Tell You

• Rising EBITDA may indicate improving cost control or growing revenue.

• Falling EBITDA can signal rising costs or declining demand.

• Comparing EBITDA margins across competitors can reveal how efficiently your business runs relative to peers in the same industry.

Remember that a high EBITDA doesn’t guarantee strong cash flow. Significant capital expenditures can still limit liquidity.

Uses and Limitations of EBITDA

Why EBITDA Is Useful

A business's EBITDA helps level the playing field when comparing different companies with different financial structures. It’s beneficial for:

• Comparing performance across industries or companies.

• Valuations and M&A, where multiples like “5x EBITDA” are common.

• Debt analysis, especially for calculating the debt-to-EBITDA ratio.

• Internal tracking, to understand trends in operational profitability.

For small businesses, it’s a valuable way to evaluate how well your operations generate profit before financing and tax effects.

Limitations and Caveats

While useful, EBITDA has significant limitations that you must keep in mind:

• It’s not GAAP-defined, so calculations vary by company.

• It ignores capital expenditures, interest, and changes in working capital.

• Overreliance can misrepresent a company's true cash flow or financial health.

EBITDA is a helpful comparative tool, but not a substitute for in-depth financial analysis. Always review EBITDA in conjunction with:

• Net income

• Free cash flow

• Margin trends

Practical Steps to Improve and Track EBITDA for Your Business

Tracking and Trending EBITDA

Use your accounting system to regularly capture the following:

• Interest, taxes, depreciation, and amortization details.

• Quarterly reports to track EBITDA trends.

• Graphs showing changes over time.

Maintaining consistent records makes it easier to identify areas for improvement or problem areas that require attention.

Actions to Improve EBITDA

Practical ways to strengthen EBITDA include:

• Improving operational efficiency: Reduce unnecessary overhead.

• Optimizing depreciation and amortization: Choose appropriate asset lives and maintenance schedules.

• Adjusting pricing or COGS: Review costs regularly to improve margins.

• Managing debt levels: Avoid excessive interest payment expenses.

Periodically reviewing your books or partnering with an expert can efficiently identify these opportunities.

Preparing for Valuation or Sale

If you’re planning to sell or attract investors, make sure you:

• Highlight steady EBITDA growth.

• Remove one-time or irregular costs for a normalized metric.

• Partner with an accountant who can prepare defensible financial statements.

Your accountant at 1-800Accountant can help ensure your EBITDA and other metrics align with valuation best practices.

Frequently Asked Questions (FAQ)

What is the difference between EBITDA and net income?

EBITDA vs. net income: EBITDA excludes interest, taxes, depreciation, and amortization, while net income includes all those items. EBITDA focuses on operational performance; net income reflects overall profitability.

Can EBITDA be negative? What does that mean?

Yes, EBITDA can be negative. A negative EBITDA indicates that operating expenses exceed revenue, signaling potential financial challenges.

What is a good EBITDA margin?

A good EBITDA margin varies by industry. For many small businesses, margins between 10% to 20% are considered healthy, but the best benchmark is your own trend over time.

Should small businesses always use EBITDA? Are there alternatives?

Small businesses should not necessarily always use EBITDA. It’s one useful metric, but it should be viewed alongside net income, cash flow, and other financial ratios.

How often should I calculate and review EBITDA?

Quarterly EBITDA reviews are ideal for tracking performance trends and guiding decision-making.

Is Adjusted EBITDA different from standard EBITDA?

Yes, they are different. Adjusted EBITDA removes non-recurring or one-time items to reflect normalized performance.

How does EBITDA tie into my tax planning and accounting with 1-800Accountant?

EBITDA analysis can identify areas for improving profitability and enhancing cost control. Your dedicated accountant can help translate that insight into actionable strategies for better tax planning and operational results.

Summary and Next Steps

EBITDA gives you a clear view of how well your small business operations perform, independent of financing or tax factors. It’s a valuable metric for tracking efficiency, benchmarking performance, and preparing for valuation.

Start by calculating your current EBITDA and margin. Then, review ways to improve cost efficiency and track progress over time.

If you’d like expert help interpreting your EBITDA or optimizing profitability, connect with 1-800Accountant, America's leading virtual accounting firm. Our team of small business accountants can help you set up accurate tracking, interpret results, and plan your next steps toward growth.

Schedule a free 30-minute consultation to get started.