Know the Figures

EBITDA & Adjusted EBITDA

EBITDA and adjusted EBITDA built up from net profit, with every add-back in plain view.

Replaces: Quality-of-earnings workpapers

How to use it

Start from the net profit in your accounts, add back interest, tax, depreciation and amortisation to reach EBITDA, then add the adjustments a buyer or lender might accept to reach adjusted EBITDA. The table shows each step so the adjustments are kept apart from what was reported.

Where the number comes from

  • EBITDA is net profit plus interest, tax, depreciation and amortisation — earnings before those four lines were taken off.
  • EBITDA margin is EBITDA as a percentage of revenue.
  • Adjusted EBITDA adds owner pay above the market rate, one-off costs and any other adjustments to EBITDA.
  • Adjustments as a share of EBITDA show how much of the adjusted figure rests on judgement rather than the accounts.

What goes wrong

The part most calculators leave out.

  • Adjustments are claims, not facts. A one-off cost that happens most years is a running cost, and a buyer will treat it as one.
  • Depreciation is added back as if it were not a real cost. If the business must keep replacing equipment at that rate, the cash goes out anyway and EBITDA overstates what is available.
  • EBITDA ignores working capital. A growing business can show rising EBITDA while stock and unpaid invoices absorb all the cash.
  • Owner pay above market works both ways: if the owner is paid below market, the honest adjustment is negative, and it is easy to leave out.
  • Interest here should be the charge in the profit and loss, not loan repayments. Repayments of principal are not an expense and must not be added back.

How much of adjusted EBITDA is adjustment

A business with 5m of revenue reports 420,000 of net profit. Adding back 110,000 of interest, 140,000 of tax, 180,000 of depreciation and 60,000 of amortisation gives EBITDA of 910,000, an 18.2% margin. The owner is paid 80,000 more than a hired manager would cost, and 50,000 went on a one-off legal case. With those 130,000 of adjustments, adjusted EBITDA is 1,040,000, a 20.8% margin. The adjustments lift EBITDA by 14.29% and make up 12.5% of the adjusted figure — every one of them is a claim a buyer will ask to see proved.

Questions

What is the difference between EBITDA and adjusted EBITDA?
EBITDA is built from the accounts as reported. Adjusted EBITDA also removes costs judged not to be part of the ongoing business, such as owner pay above market or a one-off legal bill. The adjustments are where most disagreements happen.
Is EBITDA the same as cash flow?
No. It leaves out spending on equipment and software, changes in stock and receivables, and the interest and tax that are actually paid. A business can have strong EBITDA and still be short of cash.
Why would EBITDA be negative?
Because the business loses money before financing and asset wear are even considered — revenue does not cover the cost of goods and running costs. No adjustment to interest or depreciation can fix that.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is sent to us or logged, and there is no account to create. Your browser keeps the figures with this tab’s history so that Back and Reload bring them back, and Reset clears them.

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