What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is sometimes called operating cash flow, although it is only an approximation of that.
By adding back depreciation, companies that invest a lot (a haulier with trucks) and companies that invest little (a consultancy) become more comparable. By leaving out interest, it does not matter whether the company is funded with equity or loans.
Calculate EBITDA: the formula
EBITDA = operating profit + depreciation
Operating profit or loss: item 9901. Depreciation and write-downs on fixed assets: item 630.
Operating profit already comes before financial costs (interest, item 65) and taxes (item 67/77). So you only need to add back depreciation.
Some analysts also add back write-downs on stock and receivables (631/4) and provisions (635/8), or exclude one-off costs (REBITDA). Nummo uses the simple, verifiable definition above.
Example: Bakkerij De Zoete Korst
The fictitious bakery has a gross margin of €380,000. Of that, €290,000 goes to staff and €5,000 to other operating costs. What remains is EBITDA: €85,000. After €45,000 of depreciation on the ovens, fittings and delivery van, operating profit is €40,000.
- Gross margin€380,000
- Staff−€290,000
- Other costs−€5,000
- EBITDA€85,000
- Depreciation−€45,000
- Operating profit€40,000
- Step 1
Find operating profit
Item 9901 in the income statement.
€40,000 - Step 2
Add depreciation
Item 630, depreciation and write-downs on fixed assets.
€40,000 + €45,000 = €85,000
What is EBITDA used for?
- EBITDA margin: EBITDA divided by revenue, or for small companies without published revenue, by gross margin. For the bakery that is 10.4% of revenue and 22.4% of gross margin.
- Debt to EBITDA: how many years the company would need to repay its net financial debt with EBITDA. For the bakery: loans €150,000 + €30,000 minus €60,000 in the bank = €120,000, or 1.4 times EBITDA. Banks often consider a multiple below 3 comfortable, but that is a rule of thumb that differs by sector and by bank.
- Valuation: in an acquisition, the price is often expressed as a multiple of EBITDA.
The EBITDA of Bakkerij De Zoete Korst grew every year along with gross margin.
What EBITDA does not tell you
- EBITDA is not money in the bank. Investments, repayments, taxes and extra cash tied up in stock or open invoices are not in it.
- Depreciation is a real cost: an oven will need replacing one day. A company with high EBITDA but heavy investment can still be short of cash.
- In small companies, EBITDA also depends on how the director is paid: through salary, a management company or dividends.
Calculate it yourself
To calculate EBITDA for another company, enter the figures from its annual accounts. The item numbers follow the Belgian format, which builds on the European Accounting Directive.
- EBITDA on gross margin22.4%