When you dive into the world of business finance, some acronyms start popping up so often that they feel like part of the furniture. One of the most common is the well-known EBITDA. You’ve probably seen it in annual reports, investor presentations, or even in the valuation of companies up for sale. But… do you really know what it means, what it’s used for, and how to interpret it?

In this article, we want to explain everything in a clear, practical and no-nonsense way. Because whether you're thinking about investing, buying a business or simply want to better understand how profitable a company truly is, this is something you’ll want to grasp.

The Meaning of EBITDA: a Clear and Simple Definition

What Does EBITDA Stand For and Where Does the Term Come From?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation.

Okay, it sounds very technical, we get it. But in simpler terms, EBITDA is a way to measure how much a company earns from its core operations, without taking into account how it’s financed, what taxes it pays, or accounting-related write-downs like depreciation or amortisation.

Think of it like peeling an onion: you remove the outer layers (interest, tax, etc.) until you’re left with the pure core of the business.

Basic EBITDA Formula: How to Calculate It Step by Step

Here’s the most straightforward version of the formula:

EBITDA = Revenue – Operating Costs (excluding depreciation and amortisation)

Or another common method:

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortisation

Sure, it might sound like a bit of a tongue twister at first, but stick with us – it’ll all make sense in a few minutes.

What Is EBITDA Used for in Financial Analysis?

A Tool to Measure Operating Profitability

EBITDA is widely used by analysts, investors, business buyers and banks because it offers a clearer picture of how well a company is performing operationally.

It doesn’t matter if the business has massive debts or has made large investments in equipment that depreciates over years… EBITDA focuses on how profitable the core activity is, the goods or services it produces and sells.

Advantages of Using EBITDA Over Other Financial Indicators

• Neutralises the company’s financing structure: debt levels don’t interfere with the result.

• Allows for fairer comparisons between companies in the same sector.

• Helps identify businesses with solid operational potential, even if they’re going through tough financial phases.

Is EBITDA the best metric of all? Not necessarily… but it’s definitely one of the most practical.

Differences Between EBITDA, EBIT and Net Profit

What Does Each One Include or Leave Out?

This is where confusion often starts. Let’s break it down:

• EBITDA: excludes interest, taxes, depreciation, and amortisation.

• EBIT (Operating Profit): includes depreciation and amortisation, but still excludes interest and taxes.

• Net Profit: the final bottom line – everything included, every cost deducted.

In other words, EBITDA is like the cleanest version of profit, focusing purely on the core business without external or financial factors.

Practical Examples: How They Show Up in Financial Reports

Imagine a company with a positive EBITDA but negative net profit. What might be happening?

• It could have a lot of debt and be paying high interest rates.

• Or it might have a hefty tax burden.

• Or it could be investing heavily in equipment, generating large depreciation costs.

Does this mean the company is doomed? Not necessarily. That’s why it’s important to look at all the indicators together – not just one in isolation.

Limitations of EBITDA: When It’s Not So Reliable

Accounting Tricks and a Partial View of Reality

Now comes the tricky part. Because yes, EBITDA can be misleading. Since it leaves out certain expenses, it might paint an overly rosy picture of a business.

For example:

• A heavily indebted company might look profitable on paper thanks to EBITDA, but be on the verge of insolvency.

• Or a business with large investments and amortisation costs may look healthier than it really is.

Lesson? EBITDA is useful, but don’t treat it as gospel.

Sectors Where EBITDA Can Be Misleading

In sectors with high fixed asset investment (like heavy industry, transport or energy), depreciation is a key real cost. Ignoring it can be risky.

It also doesn’t make much sense to rely on EBITDA alone in small or early-stage businesses, where financing costs may heavily impact sustainability.

How to Interpret a Company’s EBITDA: Useful Tips

What Is Considered a “Good” EBITDA?

It depends on the sector, the size of the company, and where it is in its growth cycle. Generally speaking, a positive, growing EBITDA with a healthy margin over revenue is a good sign.

You can also check the EBITDA margin (EBITDA / Revenue), which shows how much of each euro or pound earned becomes operating profit.

Sector Comparisons and Trends Over Time

Here’s a good practice: don’t look at a company’s EBITDA in isolation, compare it:

• With its direct competitors.

• With its own past performance.

• With internal targets or industry benchmarks.

Just make sure you’re comparing apples with apples, some businesses use slightly tweaked EBITDA formulas to make results look better.

Practical Example: Calculating and Interpreting EBITDA Step by Step

Realistic Assumptions to Understand Its Use

Let’s imagine this example:

• Revenue: €1,000,000

• Operating costs (excluding depreciation): €600,000

• Depreciation and amortisation: €100,000

• Interest: €50,000

• Taxes: €30,000

• Net profit: €220,000

EBITDA = €1,000,000 – €600,000 = €400,000

Or using the extended formula:

EBITDA = €220,000 + €30,000 + €50,000 + €100,000 = €400,000

Simple, right?

How to Present It in a Financial Analysis Sheet

In reports, you’ll usually see something like this:

EBITDA: €400,000  
EBITDA / Revenue: 40%  
Year-on-Year Change: +8%

That gives you a pretty good snapshot of how the business is doing. And if you’re considering buying or investing in a business, this metric should always be part of your analysis.

Conclusion: Key Takeaways About EBITDA and Its Role in Finance

EBITDA is not perfect, but it’s extremely useful. It helps you see how efficient a company is in its day-to-day operations, without being clouded by financing decisions or accounting adjustments.

That said, don’t rely on it alone. Use it as part of a broader financial assessment, alongside EBIT, net profit, debt ratios, cash flow and more.

And if you’re considering buying or selling an operating business in Spain, the smartest move is to work with a professional team. At Business in Spain we can help you fully understand these financial indicators and make the right decision.

Because knowing how to read EBITDA is the first step to seeing beyond the numbers.