EBITDA

Definition

EBITDA is earnings before interest, tax, depreciation and amortisation. By removing financing, tax and non-cash charges, it aims to show the profit a business generates from its core operations, independent of how it's financed or its accounting choices.

In plain terms

It's a way of asking 'how profitable is the actual business?' — before the effects of debt, tax rates and paper charges muddy the picture.

Why it matters for your company

Lenders and buyers use EBITDA to gauge debt capacity and value. It's useful but not cash — it ignores real capital needs. See profit vs cash flow.

In practice

Picture a small UK limited company reviewing its own management accounts ahead of a funding conversation. The finance lead starts from operating profit and adds back depreciation on equipment and any amortisation of intangibles, arriving at a figure that reflects trading performance rather than the accounting choices behind asset write-downs. If the company also carries loan interest or a corporation tax charge, those are set aside too, so the resulting number describes what the core business throws off before financing and tax decisions are layered on top.

This matters most when a company is comparing itself year on year, or against a peer with a different capital structure. A business that leases its vehicles and one that owns them outright can look very different on the bottom line purely because of depreciation policy — EBITDA is one way directors and advisers try to strip that noise out before drawing conclusions about underlying trading.

How lenders read it

Lenders tend to treat EBITDA as a starting point rather than a verdict. They will typically sit it alongside other measures to test whether operating profit comfortably supports existing and prospective debt servicing, and they will still want to understand the gap between that profit figure and actual cash generation, since working capital movements and capital expenditure can sit outside it entirely.

Because EBITDA excludes non-cash and financing items by design, lenders reading a set of company accounts (see how lenders read your company accounts) will usually cross-check it against cash flow statements rather than rely on it alone, and will look at trend over several periods rather than a single year in isolation. A related figure worth understanding alongside it is the interest cover ratio, which speaks directly to debt-servicing capacity.