EBITDA: what is it, how is it calculated, and why does it matter for your business?
When it comes to evaluating the health and real potential of a business, one financial indicator often becomes the “lens” through which investors, banks, and buyers look: EBITDA. This term, which may seem like just a sequence of letters, is in fact one of the most powerful and widely used tools in modern financial analysis.
This article is dedicated to the EBITDA indicator, and we invite you to read it to extract useful insights for an entrepreneur seeking financing solutions on the capital market.
Summary
- EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a key indicator that measures the pure operational profitability of a business, eliminating the influence of financial structure, tax policy, and accounting methods, which makes it ideal for comparing companies and assessing core efficiency.
- This indicator is calculated starting from net or operating profit, to which interest expenses, taxes, depreciation, and amortization are added; its margin (EBITDA/Revenue) is a vital tool for evaluating operational health and long-term profitability.
- EBITDA is an essential tool for attracting investment, obtaining loans, or preparing for a stock exchange listing, as investors and banks use it to assess a company’s ability to generate cash flow and to determine its value through multiples (e.g., EV/EBITDA).
Table of Contents
- Why do you need to understand EBITDA as an entrepreneur?
- What is EBITDA and what does this indicator mean for your business?
- EBITDA and the calculation formula: how do you correctly calculate this indicator?
- EBITDA calculation: practical example for a Romanian company
- EBITDA margin: how do you assess operational profitability?
- EBITDA vs. profit: the differences you need to know
- How do you use EBITDA to attract investors and prepare for a stock exchange listing?
- Conclusion: integrating EBITDA into your business strategy
Why do you need to understand EBITDA as an entrepreneur?
As a Romanian entrepreneur growing your business, understanding key financial indicators can make the difference between strategic success and failure when it comes to listing on the stock exchange and securing the financing needed for development.
As a consultant with experience in the capital market, supporting companies in attracting investors or preparing for a stock exchange listing, VERTIK stands by your side in this process. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is one of the most important indicators whose mechanisms you need to fully understand in order to obtain a solid evaluation of your company’s operational performance.
This indicator provides a clear perspective on your business’s ability to generate profit from its core activities, eliminating the influence of financing decisions and accounting policies.
For entrepreneurs who want to attract investors or prepare their company for listing on the Bucharest Stock Exchange, EBITDA becomes an essential tool for communication and valuation.
A correct understanding of this indicator will allow you to make better-informed decisions, identify opportunities for operational improvement, and demonstrate the real value of your business to potential financial partners—even in a business environment often marked by volatility, as is frequently the case in the local economy.
Whether you are preparing for a funding round or simply analyzing your company’s quarterly performance, EBITDA provides a solid foundation for evaluation. But what exactly is EBITDA, and why is it so important for your business?
What is EBITDA and what does this indicator mean for your business?
EBITDA represents a company’s profit before deducting interest, taxes, depreciation, and amortization. This acronym for “Earnings Before Interest, Taxes, Depreciation, and Amortization” has become widely adopted in international financial practice due to its usefulness in the comparative analysis of companies.
The essence of this indicator lies in its ability to highlight the pure operational performance of your business. By eliminating elements that are not directly related to core activities – such as financing costs, tax regimes, or depreciation policies – EBITDA provides a clear picture of operational efficiency.
For your company, this indicator functions as a true barometer of operational health. A consistent increase in EBITDA indicates that the business is generating more cash from its main operations, independently of how it is financed or the accounting strategies adopted.
Its practical importance manifests in several ways.
- First, it allows you to compare your company’s performance with that of competitors, even if they have different capital structures.
- Second, investors frequently use this indicator to assess a business’s cash-generating potential, setting aside specific financial and tax considerations.
- In addition, EBITDA serves as the basis for calculating valuation multiples used in mergers and acquisitions transactions.
- Companies with strong and growing EBITDA figures are perceived as more valuable and more operationally stable. This becomes particularly relevant when negotiating with potential buyers or strategic partners.
In the Romanian economic context, where many companies face challenges related to access to financing, demonstrating solid operational performance through EBITDA can open doors to new growth opportunities. Banks and financial institutions analyze this indicator when assessing a company’s loan repayment capacity. But how do you correctly calculate this indicator in order to obtain a clear picture of your performance?
EBITDA and the calculation formula: how do you correctly calculate this indicator?
Photo source: Freepik.com
EBITDA can be calculated using two main methods, both leading to the same final result, but starting from different points in your company’s income statement.
The first method starts from net profit and adds back the elements that were deducted to reach this final result:
EBITDA = Net Profit + Interest Expenses + Tax Expenses + Depreciation + Amortization
This approach is useful when you have access to complete financial statements and want to understand the contribution of each element to the difference between EBITDA and net profit. It helps you quickly identify where value is reduced in the process of transforming operating profit into net profit.
The second method is more direct and starts from operating profit (EBIT – Earnings Before Interest and Taxes):
EBITDA = Operating Profit (EBIT) + Depreciation + Amortization
This formula is preferred by many financial analysts because it focuses directly on operational performance, adding back only non-cash items (depreciation and amortization) that do not affect cash flow. Its simplicity makes the calculation faster and more transparent.
To correctly apply the formula, you need to identify the following elements in your company’s financial statements:
- interest expenses (usually found in the financial expenses section);
- corporate income tax expenses;
- depreciation and amortization expenses (which may be presented separately or included in operating expenses).
An important aspect in the calculation is the consistency of the method used.
- Once you choose an approach, maintain it in order to allow accurate comparisons between different periods.
- When presenting results to investors or partners, specify the calculation method used to ensure transparency and credibility in your analysis.
- This practice becomes essential when your company enters serious discussions with potential investors or when preparing documentation for a stock exchange listing.
Let’s see, in practical terms, how this calculation works for a Romanian company.
EBITDA calculation: practical example for a Romanian company
To illustrate the practical application of the calculation, let’s analyze the case of a fictional Romanian company, “TechRom Solutions SRL,” operating in the IT services sector, which presents the following financial data for the year 2023:**
| Financial Item | Amount (lei) |
| Total revenue | 2,400,000 |
| Cost of services provided | 1,200,000 |
| Personnel expenses | 600,000 |
| Other operating expenses | 200,000 |
| Interest expenses | 80,000 |
| Depreciation and amortization expenses | 120,000 |
| Corporate income tax | 64,000 |
The first step consists of calculating operating profit (EBIT). This is obtained by subtracting from revenues all operating expenses, excluding interest and taxes:
Operating Profit (EBIT) = 2,400,000 – 1,200,000 – 600,000 – 200,000 = 400,000 lei
Using the simplified method, we calculate EBITDA by adding depreciation and amortization to operating profit:
EBITDA = 400,000 + 120,000 = 520,000 lei
For verification, we can also use the first method. First, we calculate net profit:
Net Profit = Operating Profit – Interest – Taxes = 400,000 – 80,000 – 64,000 = 256,000 lei
Then we apply the full formula:
EBITDA = 256,000 + 80,000 + 64,000 + 120,000 = 520,000 lei
The identical result confirms the accuracy of the calculation.
- For TechRom Solutions, an EBITDA of 520,000 lei represents approximately 21.7% of total revenues, a margin considered healthy for the IT industry in Romania.
- This indicator shows that, for every leu of revenue, the company generates approximately 22 bani in EBITDA, demonstrating solid operational efficiency.
Looking further, we observe that the difference between EBITDA (520,000 lei) and net profit (256,000 lei) is 264,000 lei.
- This difference comes from interest (80,000 lei), taxes (64,000 lei), and depreciation and amortization (120,000 lei).
- For an investor, this breakdown provides valuable information about the cost structure and the impact of financing decisions on final profitability.
But how do you actually assess operational profitability using the EBITDA margin?
EBITDA Margin: How Do You Assess Operational Profitability?
The EBITDA margin is one of the most relevant indicators for assessing your company’s operational profitability, alongside the break-even point. It is calculated by dividing EBITDA by total revenues and expressing the result as a percentage:
EBITDA Margin (%) = (EBITDA / Total Revenue) × 100
This indicator provides a clear perspective on how efficiently your company converts revenue into operating profit. A high margin indicates efficient management of operating costs and a strong ability to generate cash from core activities.
The interpretation of the margin must be made in the context of the industry in which you operate.
- For example, companies in the technology sector may have margins of 20–40%, while those in retail or manufacturing may record margins of 5–15%.
- This variation is due to differences in cost structures and business models specific to each sector.
For Romanian companies, a margin above 15% is generally considered satisfactory, while a margin above 25% indicates excellent operational performance.
- It is important to compare your company’s margin with that of direct competitors in order to obtain a realistic performance assessment.
- You can access this information from the public financial reports of companies listed on the Bucharest Stock Exchange or from specialized financial databases.
Monitoring the evolution of the margin over time provides valuable insights into your company’s operational trends.
- An increasing margin may indicate improvements in operational efficiency, economies of scale, or pricing optimization.
- A declining margin may signal competitive pressure, rising costs, or operational issues requiring immediate attention.
- Quickly identifying these trends allows you to intervene proactively to protect your company’s profitability.
But what are the essential differences between EBITDA and profit, and why do you need to understand them?
EBITDA vs. Profit: The Differences You Need to Know
Understanding the differences between EBITDA and the various types of profit is fundamental for accurate financial analysis. Although both indicators measure financial performance, they offer distinct perspectives on your business’s health.
Net profit represents the final result after deducting all expenses, including interest, taxes, depreciation, and amortization.
- It reflects the actual amount available for distribution to shareholders or reinvestment in the business.
- EBITDA, on the other hand, eliminates these elements to focus exclusively on core operational performance.
The main difference lies in the purpose of the analysis.
- Net profit shows how much money actually remains in the company after all expenses and is important for evaluating dividend distribution capacity or self-financing ability.
- EBITDA provides insight into the company’s ability to generate cash from operations, independently of financing decisions and accounting policies.
A practical example illustrates these differences: two companies with the same EBITDA may have very different net profits if one has high debt (and therefore high interest expenses) while the other is financed mainly through equity. EBITDA allows comparison of pure operational performance, while net profit reflects the impact of financing decisions.
For investors, EBITDA is often preferred in comparative analyses because it eliminates the “noise” generated by differences in capital structure and accounting policies. However, it is important not to ignore net profit, as it reflects the full economic reality of the business, including actual financing costs and tax obligations.
A balanced approach involves using both indicators in a complementary way.
- EBITDA is used to assess operational efficiency and to compare performance with competitors, while net profit helps you understand overall financial performance and the company’s ability to generate value for shareholders.
- When presenting results to the board of directors or investors, include both indicators to provide a complete and nuanced picture of your company’s performance.
But how can you use EBITDA to attract investors and prepare for a stock exchange listing?
How Do You Use EBITDA to Attract Investors and Prepare for a Stock Exchange Listing?
EBITDA plays a central role in the process of attracting investors and preparing for listing on the Bucharest Stock Exchange. Understanding the various sources of financing available to companies is essential in this context.
This indicator provides investors with a clear view of the company’s ability to generate cash from operations, independently of capital structure and specific accounting policies.
In investor presentations, EBITDA should be framed within a coherent story about business growth.
- Include charts showing its evolution over the past 3–5 years, highlighting positive trends and explaining the factors that contributed to this performance.
- Investors appreciate transparency and consistency in reporting, so make sure the calculation methodology is clear and applied uniformly.
For companies preparing for a stock exchange listing, EBITDA serves as the basis for calculating valuation multiples.
- The EV/EBITDA (Enterprise Value/EBITDA) multiple is one of the most widely used indicators in valuing public companies.
- An attractive multiple can justify a favorable valuation and facilitate the listing process.
- For example, if companies in your sector trade at an average multiple of 8x EBITDA and your company has an EBITDA of €1 million, the implied valuation would be approximately €8 million.
According to studies conducted by McKinsey & Company, companies with stable and growing EBITDA have significantly higher chances of attracting investment and achieving favorable valuations on capital markets.
To increase your company’s attractiveness, focus on continuous improvement through operational process optimization, cost reduction, and efficiency gains.
- Demonstrate to investors that you have a clear strategy for maintaining and growing this indicator over the long term.
- Prepare financial scenarios showing projected EBITDA evolution over the next 3–5 years, supported by realistic and verifiable assumptions.
In the context of listing on the Bucharest Stock Exchange, companies with strong EBITDA benefit from greater confidence among institutional and retail investors.
- This often translates into more favorable offering prices and better post-listing share liquidity.
- The Financial Supervisory Authority (ASF) and the Bucharest Stock Exchange place particular emphasis on sustainable operational performance, and EBITDA is a key indicator in this evaluation.
So how can you implement EBITDA into your business strategy to achieve concrete results?
Implementing EBITDA into Your Business Strategy
Implementing EBITDA as a strategic tool in your business requires a systematic and consistent approach. This indicator should not remain just a number in financial reports but should become a guide for daily operational and strategic decisions.
- Start by establishing a regular monitoring system, calculating EBITDA monthly or quarterly to quickly identify trends and respond promptly to changes.
- Integrate EBITDA analysis into planning and budgeting processes by setting realistic yet ambitious targets for improvement.
- Communicate these targets to the management team and ensure that everyone understands the impact of their operational decisions on EBITDA.
Use EBITDA to assess the effectiveness of different business initiatives and to prioritize investments that have the greatest impact on operational performance. - Additionally, this indicator can serve as a basis for management incentive systems, aligning team objectives with operational profitability growth.
- When setting bonuses or other forms of compensation, consider including EBITDA as one of the key performance indicators.
For companies aspiring to list on the stock exchange or attract investors, EBITDA should be part of a long-term financial communication strategy.
- Be prepared to explain not only its current value but also your plans for improving it in the future.
- Develop a compelling narrative about how your company will continue to enhance operational efficiency and generate value for shareholders.
Finally, remember that EBITDA is a powerful tool, but it should not be used in isolation. Combine it with other financial indicators – such as cash flow, net profit, and return on equity – to obtain a complete picture of your company’s performance and to make informed decisions that support long-term growth.
By understanding and correctly applying EBITDA, you will be able to successfully navigate the inherent complexities of the Romanian market and secure a prosperous future for your business.
