EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a business's core operating profitability by stripping out financing decisions, accounting methods, and tax environments to show how much cash a business generates from its actual operations.
Types
EBITDA
Net income plus interest, taxes, depreciation, and amortization added back. Used to compare operating performance across businesses regardless of financing structure.
EBITDA Margin
EBITDA divided by total revenue. A 20% EBITDA margin means $0.20 of every revenue dollar becomes operating cash flow before financing costs.
Why it matters
EBITDA matters most when you are thinking about selling your business, raising financing, or comparing your performance to industry benchmarks. Buyers and lenders use EBITDA multiples to value businesses. For a dental practice or dry cleaner, knowing your EBITDA helps you understand what your business is worth.
Real-world example
A dry cleaning operation generates $800,000 in annual revenue. Net income is $60,000. Adding back $40,000 in depreciation on equipment and $20,000 in interest on a business loan gives EBITDA of $120,000, which is a 15% EBITDA margin, which is the number a potential buyer or lender would focus on.
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