EBITDA is the abbreviation you must have in your vocabulary. Below we explain what it means and what you can do with it.
EBITDA is a English abbreviation. It means earnings before iinterest, taxe, dappreciation and amortization. In Dutch, EBITDA is the profit before the deduction of interest, taxes, depreciation and amortization.
You start with your net profit (or loss). To that you add:
- net interest costs
- depreciation (depreciation of tangible assets)
- write-offs (write-down intangible assets)
What's the use of EBITDA?
In short, EBITDA is a good indication of the value of a company, for all deductions.
EBITDA is a good way to show the performance of a company because it shows the income before the accountant and financial deductions. That is why you can also compare companies based on their EBITDA.
EBITDA = true future value
Even if you startup makes little or no profit, you can in principle sell your company for a high amount.
Investors look not only at the profit, but also at the future value of a company. For example, if you have made large investments that are good for the future of your company, it will be at the expense of your profit. Because of your investments, you have less left at the bottom.
If an investor wants to know the future value of your company, he or she also looks at the EBITDA. Knowing more? Read our blog about business valuation.
Compare to EBITDA
It is difficult to compare the value of different companies. EBITDA is also a good solution for this. You leave out all external factors. That way you can compare companies better. You can also see how your company is doing compared to competitors.
Pitfalls of EBITDA
Make sure you never only look at EBITDA. This in itself does not provide a complete picture of a company's financial health. For example, you miss write-offs from expensive production machines, or high loans that have to be paid off.
EBITDA is therefore a good way to look at the future value of companies, but it does not provide a complete picture of a company's financial situation.