A note before you read: EBITDA isn't defined by US accounting standards (GAAP), so companies calculate it in slightly different ways [1]. When a lender or buyer quotes an EBITDA number, ask exactly how they worked it out.
The two numbers in one sentence each
- Net income: everything you earned, minus everything you spent and owe for the period. The final line on your profit and loss statement.
- EBITDA: net income with interest, taxes, depreciation and amortization added back, to isolate how the operations themselves are doing.
Why add those four things back?
Each one is removed for a reason:
- Interest depends on how you financed the business, not how well it runs. Two identical shops, one with a loan and one without, would show different net income.
- Taxes depend on structure and location, so they're set aside to compare operations on equal terms.
- Depreciation spreads the cost of equipment, vehicles and buildings over their useful life. It's a real cost, but no cash leaves in the month it's recorded.
- Amortization does the same for intangible assets, such as purchased customer lists or software.
What's left is a rough view of what the operations earn before those items.
A worked example
A made-up company with round numbers:
| P&L line | Amount |
|---|---|
| Revenue | $2,000,000 |
| Cost of goods sold | −$1,200,000 |
| Gross profit | $800,000 |
| Operating expenses (includes $60,000 depreciation and $10,000 amortization) | −$500,000 |
| Operating income | $300,000 |
| Interest expense | −$40,000 |
| Income taxes | −$50,000 |
| Net income | $210,000 |
EBITDA from the bottom up: $210,000 net income + $40,000 interest + $50,000 taxes + $60,000 depreciation + $10,000 amortization = $370,000.
EBITDA from the middle: $300,000 operating income + $70,000 depreciation and amortization = $370,000. Same answer, and often quicker if your P&L is laid out well.
So this business kept $210,000, and its operations generated $370,000 before financing, taxes and non-cash charges.
Side by side
| Net income | EBITDA | |
|---|---|---|
| Defined by GAAP | Yes | No, it's a non-GAAP measure [1] |
| Includes interest and taxes | Yes | No |
| Includes depreciation and amortization | Yes | No |
| Best for | Knowing what the business actually kept | Comparing operating performance over time or between companies |
| Who asks for it | Owners, CPAs, everyone | Lenders, buyers, investors |
| Can hide | Strong operations behind heavy debt | Big equipment needs and debt payments |
Adjusted EBITDA and add-backs
When a business is being valued, sold or borrowed against, you'll hear "adjusted EBITDA". It starts with EBITDA and adds back costs that won't continue under a new owner or that aren't part of normal operations. Common examples:
- An owner's salary above what you'd pay a manager to do the job
- One-time legal or consulting costs
- Personal expenses run through the business
- A one-off loss, such as a lawsuit settlement or a relocation
Add-backs are where most of the arguments happen. Every add-back needs proof: a clear note, the invoices behind it and a reason it won't recur. Clean, consistent monthly books make this far easier, because a buyer can see each item in context instead of taking your word for it.
Where EBITDA misleads
- It isn't cash. A business can show strong EBITDA and still run short of cash because customers pay late, inventory piles up or loan payments are due. See profitable but no cash and the cash flow statement explained.
- Equipment wears out. Ignoring depreciation flatters a business that needs to keep replacing trucks or machines.
- Debt still has to be paid. A lender will look at EBITDA and then at whether it covers the loan payments.
Which number should you watch?
Monthly, as an owner: watch net income and cash together, with gross margin as an early warning. See gross margin vs net margin. Service businesses should also track contribution margin by client or service line: contribution margin vs gross margin.
When borrowing: expect the bank to ask for EBITDA and a debt coverage figure. Agree the definition with them in writing.
When selling or raising money: adjusted EBITDA usually drives the conversation. Start tracking add-backs a year or two before you plan to go to market.
Want the other numbers that matter? See financial KPIs for small business.
Getting reliable numbers in the first place
EBITDA is only as good as the books under it. Depreciation has to be recorded every month, interest has to be split from loan principal, and owner expenses have to be coded so they can be added back. A monthly close with a reviewed P&L and balance sheet gets you there. See monthly financial reporting.
Keep reading
- How to read a profit and loss statement
- Gross margin vs net margin
- What a fractional CFO does all month
Sources
- US Securities and Exchange Commission, "Non-GAAP Financial Measures" compliance and disclosure interpretations, www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/non-gaap-financial-measures. Checked November 6, 2026.
Questions owners ask
What does EBITDA stand for?
Earnings before interest, taxes, depreciation and amortization.
Is EBITDA the same as net income?
No. Net income subtracts interest, taxes, depreciation and amortization. EBITDA adds them back, so it's usually higher.
Is EBITDA the same as cash flow?
No. EBITDA ignores changes in receivables, inventory and payables, equipment purchases and loan principal, all of which affect cash.
How do I calculate EBITDA from my P&L?
Take net income and add back interest, taxes, depreciation and amortization. Or take operating income and add back depreciation and amortization.
What is adjusted EBITDA?
EBITDA with one-time or owner-specific costs added back, such as above-market owner pay or a one-off legal bill. Buyers and lenders use it, and each add-back needs proof.
Which is better, a high EBITDA or a high net income?
Both matter. EBITDA shows operating strength; net income shows what the business kept after everything, including debt.
Want numbers a lender or buyer will trust?
ABFI closes your books monthly and gives you a P&L, balance sheet and the KPIs that matter. Start with a complimentary Business Accounting Diagnostic.