Why earnings before interest, tax, depreciation and amortisation (EBITDA) matters to a first-time founder
EBITDA helps compare operations before financing choices, tax and asset-cost allocation. Lenders and buyers often use it in covenants or valuation multiples. It can still overstate financial strength because it ignores capital expenditure, working-capital movements and debt payments, so founders should never describe it as cash flow without qualification.
Examples of earnings before interest, tax, depreciation and amortisation (EBITDA)
A manufacturer reports $400,000 of operating profit after $70,000 of depreciation and $30,000 of amortisation. Its EBITDA is $500,000 after adding both charges back. If it must spend $150,000 replacing machinery and customers pay slowly, the company’s cash generation can be much lower than that headline figure.
Common misunderstanding
EBITDA is not cash flow and is not the same as EBIT. EBITDA excludes depreciation and amortisation, while EBIT includes them. “Adjusted EBITDA” may also remove exceptional or management-selected costs; those adjustments are not automatically comparable or appropriate, even when a contract permits them.
When to use it
Use EBITDA for consistent operating comparisons, debt discussions or valuations when the audience understands its limits. Reconcile it to reported profit, define adjustments and review cash flow alongside it. Reporting rules for non-standard measures vary by jurisdiction and market, while loan agreements may impose their own precise definition.
US spelling: earnings before interest, tax, depreciation and amortization.