Understanding EBITDA: A Comprehensive Overview of Earnings Before Interest, Taxes, Depreciation, and Amortisation

The UK startup ecosystem remains a global powerhouse, but scaling up is getting tougher. In 2023, UK businesses attracted around $8bn in venture capital (BVCA 2024)¹. This indicates that competition is fierce and investor scrutiny is sharper than ever. Today’s investors look beyond top-line revenue, they want solid operational health.

That’s why every founder and finance director needs to ace EBITDA. This guide cuts through the jargon to give you an actionable understanding of this essential metric. You’ll also understand how to use it to communicate your company’s financial strength.

Financial insight also means optimising efficiency, especially in international trade and cash flow management. Wise Business is a popular choice among growing companies for its mid-market exchange rates and seamless global payments, helping you retain more capital and boost profitability.

By the end, you’ll understand the definition of EBITDA and how to leverage it as a strategic tool for stronger fundraising.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s a key financial metric that shows how much profit a company makes from its core operations, before factoring in costs that don’t directly relate to running the business day-to-day.

In simple terms, EBITDA tells you how well a company performs at its primary job (selling its products or services) without the effects of financing, taxes, or accounting adjustments. That’s why investors and founders often use it to get a clear view of a company’s real operating strength and ability to generate cash.

It cuts through financial noise to reveal a company’s real earning power. This makes it a reliable way to assess business efficiency before evaluating the external factors like taxes.

EBITDA: Components

Let’s look at what each part of the acronym means to grasp the concept of EBITDA. The following five components are either added back or used as a starting point to show how much profit comes purely from the company’s core operations:

• Earnings (Net Income): this is your company’s bottom line. After subtracting all expenses, including operating costs, interest, taxes, and depreciation or amortisation, it shows the total money earned from selling products or services. It’s the base from which EBITDA starts.
• Interest: this is the cost of borrowing money, such as bank loans or credit lines. It’s added back because financing choices differ from one company to another and don’t reflect how efficiently a business actually runs.
• Taxes: these are payments made to the government based on your company’s income. They’re excluded because tax rates vary by country and policy, making it hard to compare performance between businesses fairly.
• Depreciation (D): this non-cash expense shows how physical assets, like machines, vehicles, or equipment, lose value over time. It’s added back since no actual money leaves the business when this is recorded.
• Amortisation (A): similar to depreciation, this non-cash expense applies to intangible assets like patents, trademarks, or software. It’s also added back to show the company’s true cash-generating power.

This breakdown highlights why investors rely on EBITDA. It reflects the true earning power of a business, unaffected by external or non-cash factors.

How to Calculate EBITDA

Know that there are two primary formulas when learning how to calculate EBITDA. Both yield the same result and provide a clear view of operational earnings. The choice depends on which figures are most readily available on your Income Statement.

Formula 1: Starting with Net Income (The “Bottom-Up” Method)

This is the most common approach, especially when working backwards from the company’s final reported profit: the bottom line. You begin with Net Income and then add the four items excluded from EBITDA: interest, taxes, depreciation, and amortisation.

EBITDA = Net Income + Interest Expense + Tax Expense + Depreciation + Amortisation

Component	Found On	Action	Rationale
Net Income	Income statement (bottom line)	Start point	The full, reported profit
Interest	Income statement	Add back	Removes the effect of financing decisions
Taxes	Income statement	Add back	Removes the effect of government/jurisdictional policy.
Depreciation	Income statement/cash flow	Add back	Removes this non-cash accounting charge.
Amortisation	Income statement/cash flow	ADD BACK	Removes this non-cash accounting charge.

Formula 2: Starting with Operating Income (The “Top-Down” Method)

This method simplifies the calculation since Operating Income, also known as EBIT (Earnings Before Interest and Taxes), already excludes interest and tax expenses. From there, you simply add Depreciation and Amortisation back to EBITDA.

EBITDA = Operating Income + Depreciation + Amortization

Startup Example: Comparing Two Businesses

EBITDA is especially useful for fast-growing UK startups still heavily investing in their operations. It allows investors to compare companies on an “apples-to-apples” basis, regardless of differences in debt levels, tax structures, or capital investments.

For example, imagine two UK SaaS startups, Alpha and Beta.

Financial item	Startup Alpha (£)	Startup Beta (£)
Net Income (Profit/Loss)	50,000 (net loss)	£25,000 (net profit)
Interest Expense (Debt Cost)	£10,000	£0 (no debt)
Tax Expense	£0 (due to loss)	£5,000
Depreciation Amortisation (D&A)	£75000	£15,000

The EBITDA Calculation

We’ll use the first formula: Net Income + Interest + Taxes + Depreciation + Amortisation.

Startup	Calculation	EBITDA Result
Alpha	-£50,000 + £10,000 + £0 + £75,000	£35,000
Beta	£25,000 + £0 + £5,000 + £15,000	£45,000

At first glance, Startup Alpha’s £50,000 net loss looks bad. But, after adding back non-operational costs like depreciation, amortisation, and interest, its EBITDA turns positive at £35,000. The loss mainly comes from heavy investments and debt costs.

Startup Beta shows a £25,000 net profit and an even stronger EBITDA of £45,000.

This comparison shows that Beta’s core operations are performing better than Alpha’s, regardless of Alpha’s spending on new assets or debt. This insight really matters when judging a startup’s actual value and funding potential.

Uses and Applications of EBITDA

EBITDA is a critical non-GAAP (or non-IFRS) financial metric widely used in corporate finance, investment, and accounting. A few use cases of it are:

Evaluating Company Performance

EBITDA is frequently used as a proxy for the operating cash flow generated by a company’s day-to-day operations.

Core Profitability: EBITDA adds back non-cash expenses like depreciation and amortisation to show a company’s true operating profit. It helps reveal how much the business actually earns from its core activities before major investments.

Management Focus: Companies use EBITDA targets to track efficiency and motivate teams. This is because it reflects results they can directly control through sales and cost management.

Comparing Companies in the Same Industry

One of EBITDA’s greatest strengths is its ability to standardize financial comparisons across companies, a process known as “normalization.” It removes factors like interest (debt costs), taxes (which vary by country), and accounting methods for depreciation. This helps you compare businesses with different debt levels, tax systems, or reporting standards, giving a clearer picture of true performance.

Debt Servicing Capacity

Lenders and banks closely watch a company’s EBITDA because it shows how easily it can repay its debts.

Since EBITDA acts as a stand-in for cash flow, it reflects how much income is available to cover loan interest and repayments. One key measure is the debt-to-EBITDA ratio, which can help assess financial risk.

For example, a UK lender might look for a company whose total debt is only two to three times its annual EBITDA. So, a lower ratio means the business can pay off debt faster and poses less risk.

Valuation Multiples

EBITDA is key in valuing companies, especially during mergers, acquisitions, and private equity deals.

The Enterprise Value to EBITDA (EV/EBITDA) multiple is the most common method². This compares a company’s total value (including debt and equity) to its EBITDA. This helps estimate a fair value by comparing it to similar public or recently acquired companies.

In capital-heavy industries like telecom, manufacturing, and energy, EV/EBITDA is often preferred over the Price-to-Earnings (P/E) ratio because it removes distortions caused by different depreciation methods or debt levels².

That’s why credit officers in London and even global M&A teams rely on EBITDA as their go-to metric for comparable financial insight.

Why is EBITDA important for startups?

EBITDA is an exceptionally important metric for startups because it tells a clearer story about their business health. New companies often have low or negative Net Income due to high initial investment costs and non-cash expenses. However, EBITDA can show that the core business model is still profitable.

Simplifies Company Comparison

It helps to look past the individual financial choices of a startup and focus on its business model.

• Ignores financing and tax: startups often take out large initial loans or receive special tax breaks. EBITDA ignores Interest and Taxes, making it easier for investors to compare the operating performance of one startup to another, regardless of their unique debt or tax structures.
• Levels the playing field: if you’re a potential buyer looking at two similar software startups, one with no debt and one with a large bank loan, EBITDA lets you compare them based only on how well they sell software, not their loan payments.

Highlights Operational Profitability

It gives a clear vision of the operational success of a startup before accounting rules take their toll.

• Focus on core business: most startups spend a lot of money in their early years on machinery, equipment, or building a brand (intangible assets). Accounting rules require them to spread the cost of these assets over many years as Depreciation and Amortisation (D&A), which drives Net Income down.
• Shows potential: by adding back D&A, EBITDA highlights profit from core operations, showing that even if a startup reports a loss on paper, its main business can still be cash-generative.

Useful for Capital-Intensive Industries

EBITDA is often the primary measure of success for startups in sectors that require heavy initial asset spending.

• High upfront costs: companies building a factory, a logistics network, or a massive data center (all standard startup models) have huge D&A expenses. Traditional accounting would make these companies look unprofitable for years.
• Investment justification: EBITDA shows potential investors or acquirers that, while a lot of money was spent to build the business, the resulting operations are highly efficient. It justifies the large initial capital investment by proving the recurring business profits.
• Valuation: in these sectors, buyers will almost always value the company using a multiple of its EBITDA, not its Net Income. It makes the EBITDA number critical for setting the startup’s price.

The importance of EBITDA for startups lies in how it helps investors and lenders gauge a company’s real performance. In the UK tech scene, it often sets the benchmark for valuation and shows lenders how easily a startup can repay its debts.

Limitations of EBITDA

EBITDA is a valuable tool, but often criticised because it ignores essential business costs. Critics call it “Earnings Before Bad Stuff” or “Earnings Before All the Real Costs.”³ It is not a metric defined by official accounting standards like UK GAAP or IFRS.

A few limitations of EBITDA could be:

• Ignores CapEx: hides costs of maintaining assets, risking future collapse.
• Excludes financing costs: masks the burden of debt payments.
• Ignores taxes: overstates true cash available after HMRC payments.
• Not a cash flow proxy: omits CapEx and working capital changes, misrepresenting liquidity.
• Easily manipulated: companies can inflate EBITDA by reclassifying expenses.

EBITDA is a quick way to see how profitable a business’s main operations are, without being affected by taxes, debt, or accounting methods. For UK startups, it’s what investors and banks look at to gauge real profitability, even when early spending keeps you in the red. Though it should be used alongside other figures like Free Cash Flow, it remains one of the most trusted tools for measuring and comparing business value.

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• Pay and get paid worldwide: Send and receive money at the real exchange rate with no hidden markups, helping you keep more earnings.
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FAQs

What does EBITDA mean in simple terms?

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) shows a company’s profit from its main business activities before subtracting costs like loans, taxes, or non-cash expenses. In simple terms, it measures how efficiently a business runs daily.

What is a good EBITDA margin?

A good EBITDA margin depends on the industry since every sector has different costs. Generally, 5% to 15% is normal for industries with high costs like retail or manufacturing. Meanwhile, 20% to 40% (or more) is standard in efficient, low-cost sectors like software or consulting.

To know if a margin is “good,” always compare it with similar companies in the same industry.

Is EBITDA the same as profit?

No, EBITDA is not the same as profit. It is an operational earnings estimate that excludes several mandatory costs (Interest, Taxes, Capital Expenditure).

Sources:

1. UK Venture Capital Market Overview
2. Enterprise Value to EBITDA Multiple Explained
3. Board Says No to Requiring Use of Common Non-GAAP Measure

Sources last checked: 30-Oct-2025