What is EBITDA?

The calculation runs bottom-up: take net income, add back interest expense, tax, depreciation and amortization, and the remainder is EBITDA. The point is comparability. Two identical businesses can report very different net incomes purely because one is debt-financed and one is not, or because one just bought expensive equipment that depreciation now drags through the income statement. EBITDA strips those structural differences out so an owner, lender, or buyer can see the underlying earning power of the operation itself.

EBITDA is useful precisely because it is narrower than profit. It says nothing about cash flow, working capital, or the cost of replacing the assets being depreciated, which is why it is never a substitute for the cash flow statement. For small businesses it is most often used as a rough valuation multiple (for example, a multiple of EBITDA) and as a quick health check when comparing two firms in the same industry.