Why it matters
Lenders, buyers and investors use EBITDA to compare businesses with different debt, tax and depreciation profiles. It is not cash flow and it is not a substitute for net income, so it should be read with both.
Example
A business reports $200,000 of net income, $30,000 of interest, $40,000 of taxes, $50,000 of depreciation and $10,000 of amortization. Its EBITDA is $330,000 before any adjustment for owner compensation or one-time costs.
Related terms
Questions about EBITDA
Is EBITDA the same as cash flow?
No. EBITDA ignores interest, taxes and capital spending, and it does not account for changes in working capital. A business can have positive EBITDA and still run short of cash.
Why do buyers adjust EBITDA?
A buyer may adjust for owner compensation, one-time costs or non-recurring revenue to estimate what the business will earn under new ownership. The adjustments should be documented and reasonable.