EBITDA — what it is and how to interpret it?

Definition

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is profit before deducting interest, taxes, depreciation and amortization. It shows how much company earns from core operational activity.

In Polish terms: operating profit increased by depreciation.

Formula

EBITDA = Net Profit + Interest + Taxes + Depreciation

or simpler:

EBITDA = Operating Profit (EBIT) + Depreciation

Example: Company has operating profit of 80 million PLN and depreciation of 20 million PLN.

EBITDA = 80 + 20 = 100 million PLN

What is EBITDA used for?

Comparing companies

EBITDA eliminates impact of:

• Financing structure (interest) — other company may have more debt
• Tax system (taxes) — different countries, different rates
• Depreciation policy — different depreciation methods distort profit

Thanks to this, EBITDA allows comparing operational profitability of companies from different countries and industries.

Company valuation (EV/EBITDA)

One of most popular valuation indicators:

EV/EBITDA = Enterprise Value / EBITDA

EBITDA limitations

EBITDA is not a perfect indicator:

• Ignores CAPEX — company may require huge capital expenditures that EBITDA doesn't account for
• Doesn't show cash — Free Cash Flow is for that
• Can be manipulated — companies can classify costs differently
• Warren Buffett warns: "Does management think the tooth fairy pays for capital expenditures?"

Therefore EBITDA is best analyzed together with FCF and net profit, not standalone.

EBITDA Margin

EBITDA Margin = EBITDA / Revenue × 100%

Shows company's operational efficiency:

• Technology/SaaS: 30–50%
• FMCG: 15–25%
• Retail: 5–10%
• Manufacturing: 10–20%

How Freenance can help

Freenance displays EBITDA and EV/EBITDA for public companies, helping quickly assess whether given company is expensive or cheap compared to competition.

👉 Analyze company indicators with Freenance — freenance.io