What is EBITDA?

Why anyone asks for it

EBITDA strips out the costs that vary most between businesses for reasons that have nothing to do with how well they trade: how much debt a business carries, what tax position it is in, how it has chosen to finance its equipment. That makes it a rough way to compare the underlying trading performance of two businesses that might otherwise look very different on the bottom line. It is the figure most commonly asked for by lenders assessing whether a business can service debt, and by buyers valuing a business ahead of a sale.

Where it misleads

EBITDA adds back depreciation, which describes real assets genuinely wearing out and eventually needing replacement. A business with EBITDA of £200,000 and net profit of £50,000 has not found £150,000 of hidden performance, it has a set of assets that will need real cash to replace one day. EBITDA is also not cash: a business can have strong EBITDA and no cash in the bank if its debtor days are long enough.

How CFO Pal helps

CFO Pal works EBITDA out from your own ledger and prints every add-back on its own line, so you can see which costs came out rather than trusting a single number somebody else assembled.

It is deliberately fussy about what counts. Add-backs are identified by account name, and it looks for the full phrase “corporation tax” rather than the word tax on its own, because a looser match adds back PAYE and quietly flatters the figure. Where a business has no identifiable depreciation or amortisation line, the absence is stated in words rather than passed over. And if none of the four can be identified at all, the card says the figure is not available for your business instead of reporting operating profit under a borrowed name, which is the failure the section above describes.