What is EBITDA?
Short answer: EBITDA means earnings before interest, taxes, depreciation and amortisation. It is a non-GAAP or non-IFRS performance measure used to view earnings before financing, tax and specified non-cash asset charges.
A common calculation begins with net income:
EBITDA = net income + interest expense - interest income + tax expense + depreciation + amortisation
The precise bridge must follow the stated definition and the sign of each item. Starting from operating profit can produce a different route because operating profit may include or exclude items that do not match the standard EBITDA description. EBITDA removes depreciation and amortisation, but it does not remove all non-cash charges and it does not measure cash generated.
What EBITDA includes and excludes
Interest is excluded to reduce the effect of capital structure. Tax is excluded because tax profiles differ. Depreciation and amortisation are added back because they allocate recorded asset amounts rather than represent current-period cash payments. The underlying assets still require investment, replacement or maintenance. EBITDA also leaves working-capital movements, capital expenditure, lease payments, debt principal and many provisions outside the calculation.
Adjusted EBITDA goes further by adding or subtracting identified items. Covenant EBITDA follows the exact definition in a financing agreement and may include negotiated caps, pro forma savings or acquisition adjustments. Maintainable EBITDA is a transaction analysis of expected recurring earnings. These labels are not interchangeable.
Example
A company reports net income of 820. Its income statement includes interest expense of 180, interest income of 20, tax expense of 260, depreciation of 310 and amortisation of 50. EBITDA is 1,600 because 820 + 180 - 20 + 260 + 310 + 50 equals 1,600. Management then proposes adding back 140 of restructuring cost, which would produce adjusted EBITDA of 1,740. Review shows that similar restructuring costs arose in three of the last four years, so a buyer declines the adjustment and uses 1,600 before any other diligence findings. The company also spent 420 replacing equipment and absorbed 230 in additional working capital. Those cash demands do not change EBITDA, but they reduce cash available for debt service.
Why it matters in financing and a sale
Lenders use defined EBITDA in leverage and fixed-charge calculations, often with detailed rules that differ from management reporting. Buyers may apply an enterprise-value multiple to maintainable EBITDA. Investors use it to compare operating performance across periods or businesses with different capital structures. Because a multiple magnifies changes in the earnings base, the quality of the bridge can materially affect valuation and debt capacity.
Adjustment risks and reporting rules
The main traps are treating EBITDA as cash flow, adding back recurring operating costs, double-counting adjustments, using forecast savings without an agreed basis, or presenting covenant EBITDA as if it were the accounting result. SEC guidance for registrants states that EBITDA, when presented as a performance measure, should be reconciled to net income, and differently calculated measures should be distinguished by labels such as adjusted EBITDA. Other jurisdictions have their own disclosure rules. The financing agreement controls a covenant calculation, while the purchase agreement and negotiated diligence approach control a transaction use.