EBITDA is a measure of operating profitability that adds back depreciation, amortisation and interest to net profit, showing earnings before non-operating costs.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. It starts with revenue, subtracts operating expenses excluding interest, taxes, depreciation and amortisation. The result represents earnings from core operations before financing and non-cash costs.
EBITDA shows what a business earns from its operations before accounting for how it is financed, what taxes it pays, and how much its assets have worn out. It is a rough measure of operating cash generation.
A business has revenue of ₹100 lakh. Operating expenses total ₹70 lakh. Depreciation is ₹5 lakh, interest is ₹3 lakh, and taxes are ₹4 lakh. Net profit is ₹18 lakh. EBITDA is ₹30 lakh, the ₹5, ₹3 and ₹4 added back.
EBITDA of ₹30 lakh on a business with a ₹5 lakh annual depreciation charge means the business generates approximately ₹25 lakh of actual cash from operations before funding costs and taxes. This cash can fund reinvestment, debt repayment or distributions.
EBITDA is widely used in business valuation and lending assessments. It is useful as a comparison tool but can be misleading when used alone. Capital intensive businesses naturally have higher depreciation; heavily leveraged businesses have higher interest costs.
When comparing businesses or evaluating a turnaround, EBITDA removes some of the differences in financing and accounting decisions. However, it does not account for working capital requirements, capital expenditure needs, or differences in asset intensity.