EBITDA Explained: The Metric Every Buyer and Investor Looks At (2026)

EBITDA is earnings before interest, taxes, depreciation and amortisation. It exists to answer one narrow question: how much does the operating business earn, ignoring how it was financed, where it is taxed, and how its past capital spending is being written off? Buyers use it because those three things change the moment ownership does, and none of them describe the trading business itself.

What Each Add-Back Is Actually For

Interest is a financing choice. A business carrying heavy debt reports lower net profit than an identical one funded by equity, and the difference says nothing about operations. Tax is a jurisdiction and structure choice. Depreciation and amortisation are accounting allocations of money already spent in earlier years, so they reduce reported profit without touching this year's cash.

Remove all four and you get a figure two similar businesses can be compared on regardless of their capital structure, which is why it became the standard basis for transaction multiples.

Where EBITDA Is Genuinely Useful

It is the right tool for three jobs. Comparing two businesses with different debt loads, because it removes the financing difference. Setting a transaction multiple, because that is the convention buyers and lenders use. And tracking your own operating trend across a period when you refinanced or restructured, since net profit would move for reasons unrelated to trading.

It is also what lenders look at. Debt covenants are frequently written as a ratio of debt to EBITDA, so the figure has direct consequences for how much a business can borrow.

1. Start from net profit as reported, not from a management figure.
2. Add back interest expense, then income taxes, exactly as they appear in the accounts.
3. Add back depreciation and amortisation from the cash flow statement rather than estimating them.
4. List any further normalisations separately, so a reader can see EBITDA and adjusted EBITDA apart.
5. Reconcile the result against your filed return, because a buyer's adviser will do exactly that.

From the accounts
  Revenue                            $2,400,000
  Operating expenses                 $1,980,000
  Net profit                           $180,000
Add-backs
  Interest on equipment debt            $46,000
  Income taxes                          $52,000
  Depreciation                          $96,000
  Amortisation                          $14,000
  EBITDA                               $388,000
What EBITDA does not remove
  Capital spending this year           $130,000
  Debt principal repaid                 $88,000
  Increase in working capital            $41,000
  Free cash after those                $129,000
EBITDA of $388,000; $129,000 actually available.
Both figures are correct and they answer
different questions.

The gap is the whole caution about EBITDA. A business needing $130,000 of annual capital spending simply to keep operating cannot spend its EBITDA, and a buyer who values it on EBITDA alone without asking about maintenance capital expenditure is overpaying.

The Two Ways It Misleads

First, it ignores capital intensity. A manufacturer and a consultancy with identical EBITDA are not equally valuable, because one must reinvest heavily just to stand still. Depreciation is a rough proxy for that reinvestment need, and removing it removes the only signal of it in the income statement.

Second, it ignores working capital. A business growing quickly ties up cash in receivables and inventory, and that consumption never appears in EBITDA. The IRS requires businesses to keep records supporting reported income and deductions, and reading the actual filed figures alongside EBITDA is how you see the reinvestment the metric hides.