What is EBITDA?

In conversations between business owners, one acronym comes up again and again: EBITDA. It stands for Earnings Before Interest, Taxes, Depreciation and Amortisation.

Said simply, EBITDA tries to measure how much your core business activity generates — before you factor in how you finance it, how much tax you pay, and certain accounting costs tied to your investments.

A worked example

Imagine you run a renovation company. Over the year you’ve invoiced AED 1,000,000 — that’s what your clients have paid, or owe you, for the work you’ve done.

Now subtract the costs directly tied to running the business: materials, team salaries, subcontractors, warehouse rent, vehicles, fuel, maintenance, marketing, accounting, software. In total, your operating expenses come to AED 700,000.

The sum is simple: AED 1,000,000 minus AED 700,000 of operating costs leaves AED 300,000 — and that is your EBITDA.

But EBITDA is not your final profit

It looks straightforward, but EBITDA is not what the business actually earns at the bottom line. Say you took a bank loan to set the business up — that loan charges interest, let’s say AED 40,000. The company also owes corporate tax, say AED 65,000. And you bought AED 200,000 of machinery. Accounting doesn’t treat that as a single-year expense: it’s spread over several years through depreciation. This year, say, AED 30,000 of it is recorded. After all that, your accounting profit is AED 165,000.

And profit is not cash

Even then, be careful: accounting profit doesn’t mean the money is sitting in your account. You may have invoiced a million, but your clients don’t necessarily have to have paid yet. Imagine AED 200,000 is still owed to you. On paper the business shows an EBITDA of AED 300,000 and an accounting profit of AED 165,000 — but in the bank you might have only AED 50,000, while you still have payroll, suppliers and taxes to pay.

Three numbers, not one

That’s why you have to keep three concepts separate: revenue (what you invoice), EBITDA (what your core activity generates before financing, tax and accounting charges), and cash (the money you actually have). They are rarely the same number.

Who is EBITDA for?

EBITDA matters most to the people looking to buy or invest in a company. It strips out how a business happens to be financed and taxed, so a buyer can compare the underlying earning power of very different businesses on the same basis — and it’s one of the main figures they put a multiple on to value the company.

That’s exactly why EBITDA matters when you sell: it’s one of the numbers a buyer values your business on. BizBuy’s free, confidential valuation works it out for you — alongside profit, SDE and net assets — in about two minutes. Find it under “Value my business” on bizbuy.ae.