What Is EBITDA?

Key takeaways

EBITDA is a proxy measure for the cash generated by your company’s day-to-day operations, without including non-operational factors. Here are some important things to know:

• According to NYU Stern’s 2025 valuation data set, the average EV/EBITDA multiple across US companies was 18.6, ranging from 5.68 (rubber and tires) to 62.82 (non-bank and insurance financial services) [1].

• EBITDA focuses on operating profitability, removing measures related to non-operational management such as tax rates and interest expenses. 

• You can use EBITDA to measure your business success, evaluate the risk of expansions or acquisitions, and provide an evaluation to guide buying or investment decisions.

Learn more about using and calculating EBITDA to create more accurate financial models to analyze cash flow, evaluate performance, and evaluate competitor performance. To start learning now, enroll in the Accounting Data Analytics Specialization, where, in as little as three months, you can gain experience evaluating financial models with courses such as Accounting Data Analytics with Python and Machine Learning for Accounting with Python. By the end, you’ll have earned a shareable certificate to add to your portfolio. 

What is EBITDA, and why is it important?

EBITDA, short for earnings before interest, taxes, depreciation, and amortization, helps you evaluate how efficiently your business generates revenue from company operations. This is different from net income, as it excludes financing costs, non-cash expenses, and taxes. With these accounting adjustments, EBITDA shows you what you actually earn from “core” operations (everything after omitting capital expenses and taxes) and helps you measure your business success.

You can use EBITDA to see how your core earnings change over time and compare your cash flow with other organizations. For example, two companies might have very different net incomes, but once you remove interest and taxes, their profitability might actually be very similar. By understanding EBITDA, you can create a more “apples-to-apples” comparison between companies by normalizing their capital structure, tax structure, non-cash accounting decisions, and short-term working capital fluctuations. 

How to calculate EBITDA using the EBITDA formula

To calculate your organization’s EBITDA, you can use the following formula:

EBITDA = net income + interest + taxes + depreciation + amortization

In practice, this might look something like this:

Imagine your company generates $100,000 in revenue over a given year. You incur $20,000 in costs of goods sold and $10,000 in overhead costs. You calculate depreciation and amortization expenses to be $7,000, interest expenses to be $5,000, and taxes to be $15,000. 

Based on this, your net income is $43,000, calculated as: $100,000 - ($20,000 + $10,000 + $7,000 + $5,000 + $15,000) = $43,000. 

Using the formula, your EBITDA is $70,000, calculated as: $43,000 + $5,000 + $15,000 + $7,000 = $70,000. Compared to net income, this gives a clearer view of your company’s profitability without skewing the metric based on financing choices or assumptions about depreciation. 

EBITDA use cases 

You can use EBITDA to evaluate your business, attract investors, and make strategic decisions, depending on your company’s needs. Once you learn how to calculate EBITDA, you can:

• Create more accurate financial models: EBITDA provides a starting point for cash flow projections, offering a more accurate way to model company performance.

• Evaluate your business for sale: Knowing your EBITDA helps you more clearly communicate your business’s profitability and financial health to potential buyers.

• Attract investors: EBITDA allows investors to compare similar companies within an industry by providing a standardized metric across competitors.

• Evaluate operational efficiency: By isolating core operations, you can directly assess how your essential operations function independently of capital and tax-related expenditures. 

• Compare with competitors and industry benchmarks: You can use EBITDA as a reference point when comparing your organization to industry standards and assessing relative value.

• Make strategic decisions: By understanding your business performance, you can make strategic decisions related to expansions, risk tolerance, budget measures, and cost projections.

Is EBITDA the same as gross profit?

No, EBITDA and gross profit measure different aspects of your company’s profitability. Gross profit calculations look at how much your company earned from selling goods or services after taking away the cost of production. In contrast, EBITDA examines overall performance by adjusting for expenses, including interest, taxes, depreciation, and amortization. This helps you assess the operational costs that executives in the organization have control over, while removing external factors such as taxes. 

On a larger scale, while both metrics are important to understand the financial health of a company, you use them in different contexts. EBITDA provides a broader measure of your company’s ability to generate cash from operations, while gross profit shows core profitability from goods or services. 

Who uses EBITDA?

Investors, financial analysts, business owners, and accountants use EBITDA to manage and evaluate companies' financial performance. As a business owner, you use EBITDA to assess your cash flow, communicate the health of your business to stakeholders, and see how you perform relative to your competitors. 

Beyond businesses, professionals in corporate finance and investment use EBITDA to inform decisions. For example, investment bankers use measures of EBITDA to determine if a company is a good candidate for a merger or acquisition. Investors use EBITDA to determine whether a company is overvalued or undervalued, and equity research analysts employ this metric to inform their investment decisions. In some cases, you might see metrics such as the EV/EBITDA ratio, which compares a company’s total value to its earnings, used to gauge how the market values its operations. For instance, in January 2025, NYU estimated EV/EBITDAs ranging from 5.68 in rubber and tires to 62.82 in non-bank and insurance financial services, with an average of 18.6 overall [1]. 

Learn more: Strategic Planning to Improve Organizational Performance

Pros and cons of using EBITDA

While EBITDA is an excellent snapshot of your organization’s financial performance, it is a non-GAAP measure (generally accepted accounting principles), and being aware of the strengths and limitations can help you use this measure appropriately. 

Strengths

Professionals rely on EBITDA as a measure of financial health due to its strengths, including global recognition and the simplicity of its calculation. When learning about EBITDA, you’re likely to come across benefits such as:

• Widespread use: Businesses across the globe recognize EBITDA, meaning you can use this metric to communicate insights across stakeholders. 

• Simple calculations: The simplicity of the EBITDA formula makes it accessible for both small business owners and financial professionals.

• Standardized business financial evaluations: EBITDA standardizes certain financial metrics to make comparisons across businesses.

• Better business decisions: By understanding EBITDA, you can see where your business is most profitable, identify areas for improvement, and make smarter choices about where to focus your time and resources.

Limitations

While EBITDA has some limitations, combining it with other financial measures can help you gain a more comprehensive understanding of your organization’s performance. By understanding what EBITDA can—and can’t—tell you, you can take advantage of this quick financial snapshot strategically, combining it with additional insights when needed.

• No formal recognition: Accounting bodies such as the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), which establish the GAAP, do not formally recognize EBITDA, which can lead to concerns about reliability and accuracy.

• Lack of asset costs: The EBITDA formula defines profitability as a function of only sales and operations, ignoring the cost of assets. 

• Potential for inconsistent formula use: Companies may calculate components of the EBITDA formula differently, leading to inconsistent evaluations.

• Potential for misleading comparisons: Because companies don’t include debt levels or tax rates, the financial situation of companies may appear more similar (or different) than they actually are. 

What is a good EBITDA percentage and ratio?

Industry EBITDA margins (EBITDA divided by total revenue) vary widely, which means you don’t have one “good” EBITDA margin score to aim for. While this offers a comparative benchmark across companies, it’s important to consider the EBITDA margin in the context of the company type and industry. 

For example, a small company might prioritize efficiency and aim for a higher margin, while a larger company might prioritize volume growth and expect a lower margin. Generally, technology and consumer retail companies aim for EBITDA margins of around 10 to 25 percent, while industries such as energy or utilities typically target margins of 10 to 20 percent. Rather than thinking about your raw number, consider how it compares to other companies in the same sector for a better gauge of your performance.

Getting started with EBITDA analysis

To start performing your own EBITDA analysis, it’s important to understand each component of the formula. Once you know this, you can combine each number to calculate your EBITDA:

Earnings 

This is the money your business earns during your period of interest before any expenses, such as interest or taxes. This might be from sales, services, or other sources of income.

Interest

The interest is the money you pay to lenders on top of any amount owed for business loans. Different companies often have different capital structures and interest expenses, which is why you remove them when comparing relative performance through EBITDA.

Taxes

Taxes are what you pay to the federal or state government as part of your business activities. The exact tax rate you’re responsible for will depend on the location of your business.

Depreciation and amortization 

Depreciation and amortization (D&A) represents how much your long-term fixed assets lose value over time. D&A can include tangible assets (e.g., cars) or intangible assets (e.g., patents). This number tends to be heavily influenced by economic assumptions. 

Explore our free resources for financial professionals

Keep learning how to calculate and use financial metrics with industry professionals on the Coursera YouTube channel. Or, check out the following career resources:

• Learn from experts: 8 Questions with an Expert: Google Financial Data Analyst 

• Explore new markets: Financial Markets with Nobel Prize Winner Robert Shiller by Yale University

•  Find your passion: How to Reconnect with Your Career Goals

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