What Is EBITDA?

EBITDA has become one of the most widely referenced financial metrics, particularly in private equity, venture capital, and M&A contexts. By removing the effects of capital structure (interest), tax environment (taxes), and accounting policies (depreciation and amortisation), EBITDA attempts to isolate the cash-generating ability of a business's core operations.

There are two ways to calculate EBITDA. The bottom-up approach starts with net income and adds back interest, taxes, depreciation, and amortisation. The top-down approach starts with revenue, deducts COGS and operating expenses (excluding D&A), and arrives at the same figure.

FP&A teams use EBITDA for several purposes. As a performance metric, it provides a cleaner view of operational trends than net income, which can be distorted by one-off tax events or refinancing. For benchmarking, EBITDA margins enable comparison across companies with different capital structures and asset bases. In valuation, EV/EBITDA multiples are the most common method for pricing private companies.

However, EBITDA has well-documented limitations. It ignores capital expenditure requirements — a business needing £2M in annual maintenance CapEx is fundamentally different from one needing £200K, even if both report the same EBITDA. It also excludes working capital changes and can be manipulated through aggressive capitalisation policies.

Adjusted EBITDA adds back non-recurring items like restructuring costs, litigation settlements, or share-based compensation. While useful for isolating run-rate performance, the adjustments must be scrutinised — a company with "one-off" costs every year doesn't really have one-off costs.

For UK companies, EBITDA is not a defined metric under IFRS or FRS 102, so companies have discretion in how they calculate and present it. FP&A teams should document their EBITDA definition and apply it consistently.