It's a financial metric that shows how much money a company makes before taking into account certain expenses.

EBITDA is important because it gives businesses an idea of how much money they're generating from their operations.

This is useful for investors and lenders who want to know how profitable a company is.

It’s like a scorecard to know how much money a company is making.
How is EBITDA calculated?

To calculate EBITDA, you need to start with a company's revenue and subtract its cost of goods sold.

Then, you subtract its operating expenses (like salaries and rent).

This gives you the company's EBITDA.

Example:

Let's say you and your friends sell lemonade from a stand.

You make R200 selling lemonade, but you spent R50 on lemons, sugar, and cups.

You also spent R50 on flyers to advertise your lemonade stand.

To calculate your EBITDA, you would start with the R200 you made selling lemonade, and subtract the R50 you spent on lemons, sugar, and cups.

This leaves you with R150. Then, you would subtract the R50 you spent on advertising.

This leaves you with an EBITDA of R100


EBITDA vs Net Income

Imagine that on top of your expenses of your lemonade stand you have to pay taxes (for example to be allowed to sell on the street).

Imagine as well that you need to put money aside to invest in a new machine or a new stand because your machine is getting old.
This is called depreciation.

In EBITDA, you don’t take consideration these expenses.

But the net income is what remains as profit after all these expenses are taken in account.

Do you have other examples?

Check Out!