EBITDA stands for earnings before interest, tax, depreciation and amortisation. It takes operating profit and adds back the two largest non-cash expenses - depreciation and amortisation - to approximate the cash a business's operations generate before financing and tax.
What it means
By removing interest and tax (which depend on financing and jurisdiction) and depreciation and amortisation (which are non-cash and depend on accounting estimates), EBITDA aims to compare the underlying earning power of different businesses on a like-for-like basis. It is widely used in valuation, but it is not a formal statement line and can flatter a business by ignoring real capital costs.
Where it fits in
Payroll cost is not added back in EBITDA - salaries and wages are a genuine cash operating cost and remain fully deducted. Only depreciation and amortisation are added back, so EBITDA still reflects the full burden of employing people.
Key rules
- EBITDA = earnings before interest, tax, depreciation and amortisation.
- Starts from operating profit and adds back depreciation and amortisation.
- A proxy for operating cash generation, not a formal statement line.
- Payroll cost stays deducted; only non-cash write-downs are added back.
