EBITDA: what it is, how it is calculated, and how to interpret it to make better business decisions

The EBITDA is one of the most widely used financial indicators for analyzing a company’s profitability. It appears in reports, conversations with banks, investor presentations, and company comparisons… yet its meaning and proper use are not always well understood.

In this guide, we explain what EBITDA is, how to calculate it step by step, how to interpret it correctly, and which mistakes to avoid, with a practical approach designed for SMEs, startups, and growing businesses.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, meaning:

Profit before interest, taxes, depreciation, and amortization

In practice, EBITDA measures the operating profitability of a business, focusing solely on the company’s core activities. It is important to note that, unlike operating profit or net profit, EBITDA is not an accounting metric formally defined under the Spanish General Accounting Plan (PGC). Instead, it is considered a management indicator or a “proxy” for operating cash flow, which has important implications for how it is calculated and used in contracts.

As a non-accounting indicator, EBITDA isolates results from factors such as:

• Financial structure (debt interest expenses).
• Tax burden (taxes).
• Non-cash accounting expenses (depreciation of fixed assets and impairment-related amortization).

This is why it is widely used to compare companies, assess business viability, or evaluate a company’s ability to generate resources.

 

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What is EBITDA used for?

EBITDA is mainly used to:

• Analyze whether the business is operationally profitable
• Compare companies within the same industry
• Evaluate a company’s ability to manage debt
• Serve as the basis for financial ratios (EBITDA margin, Debt/EBITDA, etc.)
• Support financing, valuation, or investment processes

That said, EBITDA is not everything. Later, we will look at its limitations.

How is EBITDA calculated?

There are two common ways to calculate EBITDA.

Starting from operating profit (EBIT)

This is the simplest method:

EBITDA = EBIT (Operating Profit) + Depreciation + Amortization

EBIT is an official item in the profit and loss statement. By adding back depreciation and amortization (which are accounting expenses without cash outflow), EBITDA is obtained.

Starting from net profit

It can also be calculated as follows:

EBITDA = Net Profit + Taxes + Interest + Depreciation + Amortization

This method is used when starting from the bottom-line result and “reconstructing” operational profitability.

Simple example

A company reports:

• Net profit: €120,000
• Taxes: €30,000
• Interest: €10,000
• Depreciation and amortization: €40,000

EBITDA = €200,000

This amount reflects what the business generates before financial decisions, taxes, and accounting adjustments.

Important: For EBITDA to be reliable, the accounting records must be properly classified and up to date. An error in the profit and loss statement can completely distort the indicator.

At Adlanter, we help companies maintain rigorous accounting focused on decision-making, not just formal compliance.

How should EBITDA be interpreted?

A positive EBITDA indicates that the company’s core activity generates resources.

A negative EBITDA is a serious warning sign: the business is not operationally profitable.

However, the absolute figure alone is not enough. To interpret EBITDA correctly, it is important to analyze:

• Its evolution over time: Is it growing, stable, or declining?
• The EBITDA margin: What percentage of revenue is converted into EBITDA?
• Its relationship with debt: How many times does it cover financial debt?
• The industry and company size: The same value may be good in one sector and poor in another.

👉 This is why EBITDA is often complemented with financial reporting and comparative analysis, to truly understand what is happening within the company.

EBITDA Margin: the key to comparing companies

The EBITDA margin is calculated as follows:

EBITDA Margin = EBITDA / Revenue

This percentage indicates what portion of sales turns into operating profit.

• A high margin usually indicates operational efficiency
• A low margin may reflect high costs or pricing pressure

⚠️ There is no universal “good margin”: it depends heavily on the industry.

Advantages of EBITDA

EBITDA is one of the most widely used financial indicators because it provides a quick and standardized view of a company’s operating profitability. When properly understood, it is a highly useful tool for analysis and decision-making.

These are its main advantages:

It allows comparison between companies with different financial structures

Since it excludes interest and debt, EBITDA makes it easier to compare companies financed in different ways (one with high debt and another funded through equity). Two companies with the same business model but different debt levels can therefore be analyzed on equal operational terms.

It removes tax and accounting “noise”

Taxes depend on the country, timing, and tax planning strategies, while depreciation policies may vary according to accounting criteria. EBITDA removes these variables to focus solely on the company’s ability to generate results through its core operations.

It is easy to calculate and understand

Unlike more complex indicators, EBITDA is derived directly from the profit and loss statement. This makes it a KPI accessible to executives, shareholders, investors, and financial institutions alike.

It is widely used by banks and investors

EBITDA is a common benchmark in financing processes, risk analysis, company valuations, and investor negotiations. Ratios such as Net Debt / EBITDA rely directly on this indicator.

Limitations and risks of EBITDA (very important)

This is where most mistakes occur. EBITDA is useful, but it can also lead to misleading conclusions if analyzed in isolation. EBITDA:

Is not cash (it is not available money)

A positive EBITDA does not mean the company has liquidity. It does not reflect collections, payments, working capital investment, or cash flow pressures. A company may have strong EBITDA and still face cash shortages.

Does not take into account the investments required to maintain the business

Depreciation and amortization are excluded from the calculation, but assets still need to be renewed and paid for. A capital-intensive business may show attractive EBITDA while requiring significant cash outflows year after year.

Does not reflect taxes or debt

EBITDA ignores two key elements of business reality: tax burden and financing costs. Therefore, it does not indicate how much profit a company actually earns or how much money remains available for shareholders.

Risk of manipulation and legal consequences

The flexibility in its calculation may lead to an overly optimistic presentation. Accounting practices that do not adhere to the principle of true and fair view can seriously distort this indicator. “Inflating” EBITDA through adjustments or improper accounting classifications may result in serious legal consequences during transactions, including claims for misrepresentation or fraud, or breach of contract.

For all these reasons, EBITDA should never be used in isolation.

Strong EBITDA without proper financial, tax, and treasury control can create a false sense of financial health and lead to poor decisions.

EBITDA vs EBIT vs Net Profit

Although related, they do not measure the same thing. Each indicator answers a different question:

• EBITDA: measures the “pure” operating profitability of the business, before depreciation, taxes, and interest. It is useful for analyzing efficiency and comparing companies.
• EBIT: measures operating profitability after depreciation, taking into account the actual wear and tear of assets. It is a metric closer to the company’s economic reality.
• Net profit: is the final bottom-line result after deducting taxes, interest, and all expenses. It reflects what the company truly earns (or loses).

Each serves a different purpose:

• EBITDA helps analyze the business.
• EBIT provides a more realistic view of operations.
• Net profit shows the final impact of all decisions.

Understanding their differences is essential for properly analyzing a company and making informed decisions.

EBITDA and financing: what banks and investors look at

One of the most widely used ratios is:

Net Debt / EBITDA

This ratio indicates how many years the company would need to repay its debt using its current EBITDA. The lower the ratio, the better.

This ratio is so important that financial institutions often include it in financing agreements through clauses known as covenants. A covenant is a contractual obligation to maintain certain financial ratios within agreed limits.

Breaching these covenants may trigger early repayment clauses, allowing the bank to demand immediate repayment of the entire debt.

For this reason, when a company seeks financing, EBITDA must be properly calculated, documented, and explained.

At Adlanter, we support companies through financing processes, reporting, and the presentation of financial information to third parties.

Common mistakes when calculating EBITDA

• Including extraordinary income or expenses
• Mixing personal expenses with business expenses
• Failing to distinguish accounting depreciation from actual investment
• Comparing EBITDA across different sectors without considering margins
• Believing that EBITDA equals profit or cash

Avoiding these mistakes makes the difference between using EBITDA as a real management tool or merely as a decorative figure.

Frequently asked questions about EBITDA

Does a high EBITDA mean the company is doing well?

Not necessarily. Debt, investments, and cash flow must also be analyzed.

Does EBITDA pay taxes?

No. Taxes are calculated based on profit, not EBITDA.

Can EBITDA be manipulated?

Yes, if accounting practices are not rigorous or if poorly justified “adjustments” are made.

Is it useful for freelancers and SMEs?

Yes, especially for analyzing profitability and growth.

EBITDA: a powerful tool when used correctly

EBITDA is a very useful indicator for understanding a company’s operating profitability, but it only works when supported by solid accounting and sound financial analysis.

If you want to:

• calculate your EBITDA correctly
• interpret it in context
• prepare information for banks or investors
• or improve your company’s financial control

At Adlanter, we help you with accounting, tax, and financial advisory services tailored to every stage of your business.