It strips out financing and accounting choices to show core operating profit — useful for comparison, but easy to misuse.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It strips out financing decisions (interest), tax situations (taxes), and non-cash accounting charges (depreciation and amortization) to reveal a company's core operating profitability.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Each item is "added back" because it reflects something other than day-to-day operations.
With $200,000 net income plus $20,000 interest, $50,000 taxes, $30,000 depreciation, and $10,000 amortization, EBITDA is $200,000 + $110,000 = $310,000. On $1M revenue, that's a 31% EBITDA margin.
Net income is the true bottom line after every expense. EBITDA adds several real costs back, so it's higher and more comparable across companies — but less complete as a measure of actual profit. Both belong in your analysis.
EBITDA is not cash flow. It ignores capital expenditures, working-capital changes, and the real cost of debt. A capital-intensive business can post strong EBITDA while generating little free cash.
Because it excludes real costs like equipment replacement, EBITDA can flatter a business. Use it alongside net income and free cash flow, never on its own.