You are in a meeting, or you are looking at a competitor's figures, and suddenly the magic word drops: "Yes, but what is their EBITDA?" Everyone nods, but many business owners do not know exactly what it means. Is it profit? Is it cash? And why do banks and acquirers look at it instead of at what remains at the bottom line?
What does EBITDA mean?
EBITDA is an acronym: Earnings Before Interest, Taxes, Depreciation and Amortization. In other words: the profit before interest, taxes, depreciation of tangible assets (machines, vehicles, buildings) and amortisation of intangible assets (goodwill, software, licences).
Put differently: what the company earns with its core activity (baking bread, writing software, building houses), before you take into account how it is financed, how much tax it pays and how heavily it invested in the past. In Belgian annual accounts that figure is not a separate line, but you extract it in two steps.
Calculating EBITDA from the income statement
The formula is simple: EBITDA = operating profit (or operating loss) + depreciation, amortisation and write-downs. The operating profit is in every set of annual accounts (code 9901, also in the abbreviated format), the depreciation is under operating costs (code 630). Interest and taxes only come after the operating profit, so you do not have to filter them out any more.
A worked example with the income statement of a fictitious SME, a joinery with its own workshop:
| Income statement | Amount |
|---|---|
| Gross margin | €850,000 |
| Staff costs | -€575,000 |
| Depreciation, amortisation and write-downs (code 630) | -€95,000 |
| Operating profit (code 9901) = EBIT | €180,000 |
| Financial costs (interest on loans) | -€25,000 |
| Taxes | -€38,000 |
| Net profit | €117,000 |
| EBITDA = 180,000 + 95,000 | €275,000 |
So the same joinery shows three very different profit figures: 275,000 euros EBITDA, 180,000 euros EBIT and 117,000 euros net profit. All three are correct; they just answer a different question. If you want to see what that EBITDA is worth as a credit limit, enter your own figures or those of a competitor in the credit limit calculator.
Why banks and acquirers look at it
Comparing apples with apples
Suppose you want to compare two bakers. Baker A bought his ovens with the family's savings and has no loan. Baker B just started, borrowed heavily from the bank and pays a good deal of interest every year. If you look at net profit, A looks fantastic and B almost bankrupt. But maybe B sells twice as much bread. By looking at EBITDA you filter out the financing and see who is the best baker, not who has the richest family.
The same goes for depreciation. A transport company that bought ten new trucks last year books high depreciation for years and shows a low net profit, while the engine runs fine. Why that is sometimes even good news is explained in depreciation in the annual accounts.
Repayment capacity
A bank assessing a loan divides the net financial debt by EBITDA. If that ratio is below 3, the company can in principle repay its debts within three years from its operating profit. Above that, the conversation gets harder. On the Key financials tab you also see the interest coverage: how many times the operating profit covers the interest charges.
Company value: the EBITDA multiple
Anyone who ever buys or sells a company encounters the formula: "I pay x times EBITDA." The buyer usually does not take over the debts (they are repaid at the sale) and has their own tax structure. They want to know what the machine yields in their hands, and EBITDA is the best approximation of that.
The multiple depends on the sector, growth, dependence on the managing director and how predictable the turnover is. These are benchmarks for Belgian SMEs, not law:
| Sector | Benchmark EBITDA multiple | Why |
|---|---|---|
| Hospitality, retail | 2 to 4x | Low margins, strongly dependent on location and operator |
| Construction, transport | 3 to 5x | Project-based, heavy investments in equipment |
| Wholesale, manufacturing, services | 4 to 6x | Stable customer base, scalable |
| Software, SaaS, recurring revenue | 6 to 10x and higher | Predictable income, high margins, little capital needed |
Apply the multiple to the joinery above: 275,000 euros EBITDA times 4 to 5 gives an enterprise value of 1.1 to 1.4 million euros. From that the net financial debt is still deducted to arrive at the value of the shares. How to do that sum for a competitor is explained in how much is your competitor really worth.
The pitfall: EBITDA is not cash
Is EBITDA sacred, then? No. There is a well-known saying in finance: "EBITDA is profit before all the bad things." The figure ignores investments, and those have to be paid for at some point.
Take a transport company again. The EBITDA is beautiful, but the trucks are worn out and five new ones are needed every year for €500,000. That expense is not in the EBITDA (in the income statement it appears as depreciation, spread over years). So you can have a fine EBITDA and still get into trouble because there is no money for new trucks. Therefore, next to EBITDA, also look at capex (investments) and cash flow on the Key financials tab.
A second blind spot: EBITDA says nothing about the balance sheet. A company with a strong EBITDA but negative equity remains a risky customer. So always combine the figure with solvency and liquidity, for instance through the health score calculator.
In summary
EBITDA is the best figure to measure the strength of the core activity and to compare companies with each other, independent of financing, taxation and investment rhythm. That is why banks use it for credit decisions and acquirers for valuations.