Get EBITDA — earnings before interest, taxes, depreciation, and amortization — plus the EBITDA margin, the metric buyers and lenders lean on.
EBITDA = net income + interest + taxes + depreciation + amortization. It approximates operating cash generation but ignores capital spending and working-capital needs — a common critique. Useful for comparing companies with different debt and tax situations. Not investment advice.
EBITDA takes net income and adds back the four items that vary most with financing, tax, and accounting choices — interest, taxes, depreciation, and amortization. That makes it a rough proxy for operating cash flow and a common yardstick when lenders and buyers compare businesses on equal footing.
EBITDA = net income + interest + taxes + depreciation + amortization
EBITDA starts at net income and adds back four things: interest, taxes, depreciation and amortization. Interest depends on how the business is financed, taxes on its structure and location, and depreciation and amortization on accounting choices about spreading past purchases over time. Stripping them out leaves a figure that is easier to compare between businesses that borrowed differently or bought equipment at different times. That is why lenders and buyers of small businesses often start their conversation there.
Net income is $40,000. Add interest of $6,000 and taxes of $9,000 to get EBIT of $55,000, the operating profit before financing and tax. Add depreciation and amortization of $12,000 to reach EBITDA of $67,000. Total add-backs are $27,000. On $200,000 of revenue that is a 33.5% EBITDA margin, against a 20% net margin. The 13.5-point gap is entirely those four add-backs.
Now the honest adjustment. Suppose the business must spend $15,000 a year replacing vehicles or equipment just to keep operating. EBITDA ignores that spending. Subtract it and roughly $52,000 is left, a quite different number if you are deciding what the business can afford in loan payments or what a buyer should pay for it.
So EBITDA is a comparison tool, not a measure of cash you can spend.
When a small business is valued or financed, people often talk about "adjusted" EBITDA. That usually means normalising the owner's pay to a market salary and removing genuinely one-off costs. These adjustments are where most disagreement happens. Each one should be documented and defensible, because an adjustment that reads as optimistic tends to invite scrutiny of all the others. Valuation multiples applied to EBITDA vary widely by industry, size and risk. This page does not estimate them, and any single multiple you read online should be treated with caution.
EBITDA is only as reliable as the categorisation underneath it: interest, tax and depreciation have to be recorded in their own lines all year, not dug out of a lump of "expenses" when a lender asks. Keeping clean categories, for example in the ToolWise small-business bookkeeping workbook, makes this a two-minute calculation instead of a weekend. For the next views of the same books, try the profit margin calculator and the gross profit calculator.
It normalizes away debt loads and tax quirks, so two similar businesses can be compared and valued on a multiple of EBITDA regardless of how they're financed.
It ignores the real cash needed for equipment (capex) and working capital, so a business can show strong EBITDA and still be cash-starved. Use it alongside cash-flow measures.
Related: operating margin calculator · profit margin calculator · depreciation calculator · all free calculators.
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