What Is EBITDA and Why Do Investors Care About It So Much?
📈 Funding & Investors · By Fincaly Team · · 8 min read
What is EBITDA? EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It measures how much profit your business makes from its core operations, before financing choices, tax and accounting adjustments. Investors use it to compare businesses and to estimate what a business is worth.
If you have been to an investor meeting, a funding event or read anything about valuing a business, you have almost certainly met this term. It is often used with great confidence by people who assume everyone knows it, and with quiet confusion by owners who do not. This guide explains it simply.
What is EBITDA and what does it stand for?
- Earnings: the profit of the business
- Before interest: ignoring the cost of loans and other financing
- Before taxes: ignoring income tax
- Before depreciation: ignoring the gradual reduction in value of equipment and other assets
- Before amortisation: ignoring the spreading out of costs for intangible assets, such as software or licences
By removing these items, EBITDA shows what the business generates purely from operating, which is easier to compare between companies.
How to calculate EBITDA
Start with net profit and add back the four items:
EBITDA = net profit + interest + taxes + depreciation + amortisation
Example with illustrative figures in Naira:
| Item | Amount (₦) |
|---|---|
| Net profit | 3,000,000 |
| Interest on a loan | 400,000 |
| Taxes | 600,000 |
| Depreciation of equipment | 500,000 |
| Amortisation | 100,000 |
| EBITDA | 4,600,000 |
For many small businesses with little debt and few assets, EBITDA is close to operating profit, because there is little interest, depreciation or amortisation to add back. If your records are simple, you may find your EBITDA by adding back only the items that actually apply.
Why investors and lenders use EBITDA
- Comparison. It allows them to compare businesses with different loans, tax situations and accounting choices.
- Operating strength. It shows whether the core business earns money, regardless of how it is financed.
- Valuation. Many valuations apply a multiple to EBITDA.
- Cash indication. It is a rough guide to the cash a business generates from operations, although it is not the same as cash flow. See cash flow vs profit.
EBITDA multiples and valuation
Businesses are often valued as a multiple of EBITDA. The multiple depends on industry, growth, risk, size and the buyer. For small businesses the range can be wide, and numbers you read online may not fit your market, so treat any single multiple with care. As an illustration only: if a business has an EBITDA of ₦4,600,000 and an investor considers a multiple of 3 to 5, the implied value range would be ₦13.8 million to ₦23 million. The multiple is negotiated and depends heavily on how stable the earnings look.
The key lesson is that each naira you add to EBITDA can raise the value of the business by the multiple. Improving operating profit therefore has a direct effect on what your business could be worth.
EBITDA for very small businesses and sole traders
If you run a one-person business or a small shop, you may think EBITDA is only for large companies. It is still useful as a habit. Calculating it once a year forces you to separate how the business performs from how it is financed and taxed. That is the same view a buyer, partner or lender will take.
It also helps you compare years fairly. If you take on a loan to buy equipment, your net profit may fall because of interest and depreciation, even though the business itself is running just as well. EBITDA shows that the operations did not get worse. For daily decisions, though, net profit and cash flow remain more important for a small business.
The limits of EBITDA
EBITDA is useful but not perfect.
- It ignores the real cost of replacing equipment
- It ignores interest and taxes that you still have to pay
- It does not show cash movements, such as customers paying late
- It can flatter businesses with heavy debt
Look at it together with net profit, cash flow and margins. Read understanding profit and loss and gross profit vs net profit.
How to improve your EBITDA
- Raise prices carefully, especially on low-margin items. See how to price products for profit.
- Cut operating costs that bring no return. See business expenses out of control.
- Increase repeat business to make revenue steadier.
- Improve efficiency to reduce waste and idle time.
- Keep clean records so that buyers trust the number.
How Fincaly helps you track and improve EBITDA
Fincaly's Business Valuation feature calculates your EBITDA from your logged data and uses it as one of three methods to estimate your business value. The Financial Health dashboard tracks operating costs, which are the main lever for improving EBITDA.
Fincaly feature: Business Valuation. See your EBITDA-based valuation and investor readiness score automatically. Explore Business Valuation
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Next steps
EBITDA is not an intimidating concept. It is a way to measure how much your business earns from its core operations. Calculate yours from last year's figures, watch its trend, and read how to prepare your business finances for investors.
Cover photo by Markus Winkler on Unsplash.
Frequently asked questions
What does EBITDA stand for?
Earnings before interest, taxes, depreciation and amortisation.
Is EBITDA the same as cash flow?
No. EBITDA is a profit measure before certain costs. Cash flow tracks actual money moving in and out, including timing differences, tax, interest and spending on equipment.
Why do investors use EBITDA multiples?
They give a quick way to compare businesses and estimate value from operating earnings, although the right multiple depends on industry, size, growth and risk.