What Is EBITDA? Meaning, Formula and How Investors Use It
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It is a profit measure that shows what a company earns from its core operations before the cost of debt and the tax bill. It also leaves out the accounting charges for wearing down assets.
In short, the EBITDA meaning is operating earnings before financing and accounting choices. EBITDA is not defined by IFRS or US GAAP, as the Corporate Finance Institute notes. Companies that report EBITDA set their own definition and usually reconcile it to net profit. This guide covers the formula and the margin. It then looks at valuation and debt ratios before turning to the main criticisms, with figures from Ferrari and Deutsche Telekom.
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
Table of Contents
What Does EBITDA Stand For?
Each letter in the acronym marks a line that is added back to profit.
| Letter | Stands for | What it covers | Why it is added back |
|---|---|---|---|
| E | Earnings | Profit for the period | Starting point |
| B | Before | Signals the items that follow are excluded | Not applicable |
| I | Interest | Net interest or financial expense | It depends on how the company is funded |
| T | Taxes | Income tax expense | It depends on the tax system |
| D | Depreciation | Wear of tangible assets such as plants and machines | Non-cash accounting charge |
| A | Amortisation | Write-down of intangibles such as software and patents | Non-cash accounting charge |
Source: Corporate Finance Institute.
The idea dates back to the 1970s. Investor John Malone developed it to judge the cash-generating ability of telecom companies, according to Wikipedia.
What Is EBITDA in Finance?
In finance, EBITDA works as a rough proxy for operating cash earnings. Analysts use it to compare companies with different debt levels and tax rates. It sits between revenue and net profit, although many companies show it only in their results tables. Ferrari, the Italian carmaker, is the main real-company example in this guide.
How to Calculate EBITDA
There are two common routes. Both give the same answer when operating profit is defined consistently.
EBITDA Formula From Net Income
EBITDA = Net income + Income tax + Interest expense + Depreciation + Amortisation
This bottom-up route starts at the last line of the income statement and works upwards.
EBITDA Formula From Operating Income
EBITDA = Operating profit (EBIT) + Depreciation + Amortisation
This top-down route is quicker when a company reports operating profit as a separate line.
EBITDA Example With a Fictional Company
| Line (EUR million) | Amount |
|---|---|
| Revenue | 10,000 |
| Cost of goods sold | (6,000) |
| Operating expenses excluding depreciation and amortisation | (1,500) |
| Depreciation and amortisation | (800) |
| Operating profit (EBIT) | 1,700 |
| Net interest expense | (200) |
| Profit before tax | 1,500 |
| Income tax at 25% | (375) |
| Net income | 1,125 |
Illustrative figures only. This is our own example and does not describe a real company.
- The net income route gives 1,125 + 375 + 200 + 800 = 2,500.
- The operating income route gives 1,700 + 800 = 2,500.
A Real EBITDA Calculation: Ferrari
Ferrari publishes an EBITDA reconciliation in its results releases. The table uses the company's own lines.
| EUR million | Q3 2026 | Q3 2025 | FY2025 |
|---|---|---|---|
| Net profit | 431 | 382 | 1,600 |
| + Income tax expense | 128 | 108 | 464 |
| + Net financial expenses | 4 | 13 | 46 |
| = Operating profit (EBIT) | 563 | 503 | 2,110 |
| + Amortisation and depreciation | 190 | 167 | 662 |
| = EBITDA | 753 | 670 | 2,772 |
| Net revenues | 1,896 | 1,766 | 7,146 |
| EBITDA margin | 39.7% | 37.9% | 38.8% |
Source: Ferrari Q3 2026 results release and Ferrari FY2025 results release. Past performance is not a reliable indicator of future results.
Ferrari reported zero adjustments in these periods, according to its Q3 2026 release and FY2025 release, so its EBITDA and its adjusted EBITDA are the same figure.
EBITDA Margin: Formula and What It Shows
EBITDA margin formula: EBITDA margin = EBITDA ÷ Revenue × 100
The margin shows how much operating earnings each euro of sales produces before depreciation and amortisation. In the fictional example, the EBITDA margin is 25%. Its EBIT margin is 17%, and its net margin is 11.25%.
The ratio works best for comparing firms of different size in the same industry. It also tracks one company over time.
What Is a Good EBITDA Margin?
A good margin depends on the sector. Telecoms and utilities carry large depreciation costs, which sit below the EBITDA line, and both report high EBITDA margins in the table. Vehicle makers and airlines also run heavy assets, yet their margins are much lower.
| US sector | EBITDA as % of sales |
|---|---|
| Grocery and food retail | 5.40% |
| Vehicle makers | 7.49% |
| General retail | 10.11% |
| Air transport | 10.27% |
| Integrated oil and gas | 21.67% |
| Telecom services | 34.70% |
| General utilities | 34.92% |
| System and application software | 35.93% |
| Semiconductors | 36.77% |
| Total US market (5,994 firms) | 16.56% |
Source: Aswath Damodaran, NYU Stern, Margins by Sector (US), data as of January 2026. Past performance is not a reliable indicator of future results.
Ferrari's Q3 2026 margin of 39.7% compares with 7.49% for US vehicle makers in this dataset. Ferrari is not part of this US dataset, so the comparison is only a rough guide. One likely reason for the gap is a luxury model with small volumes. A high margin can still shrink if costs rise or the product mix weakens.
Deutsche Telekom shows how one company can report two margins. In Q3 2026 its net revenue was EUR 31,102 million and its adjusted EBITDA was EUR 13,791 million, a margin of about 44.3% (our calculation). Its adjusted EBITDA AL, which deducts lease costs, was EUR 12,210 million, or about 39.3%. The Deutsche Telekom Q3 2026 release adds that "Other companies may define these terms in different ways."
EBITDA vs EBIT vs EBITA vs Net Income
The four measures differ only in which costs they deduct.
| Measure | Interest | Taxes | Depreciation | Amortisation | Typical use |
|---|---|---|---|---|---|
| Net income | Deducted | Deducted | Deducted | Deducted | Earnings per share and P/E |
| EBIT | Added back | Added back | Deducted | Deducted | Operating profitability |
| EBITA | Added back | Added back | Deducted | Added back | Firms with large acquired intangibles |
| EBITDA | Added back | Added back | Added back | Added back | EV/EBITDA and debt ratios |
Source: Wikipedia and Corporate Finance Institute.
- EBIT equals EBITDA minus depreciation and amortisation.
- EBITA equals EBIT plus amortisation.
- Net income equals EBIT minus interest and tax.
In the EBITA vs EBITDA comparison, EBITA keeps depreciation as a cost. Wikipedia notes that EBITA reflects the asset base but "has not found widespread adoption". EBIDA, a rarer variant, keeps taxes deducted. EBITDAR adds back rent, which helps when peers own or lease their assets in different ways.
For Ferrari in Q3 2026, EBIT was EUR 563 million and EBITDA was EUR 753 million. The EUR 190 million gap equals its depreciation and amortisation.
Adjusted EBITDA
Adjusted EBITDA removes items that management treats as unusual. Ferrari, for example, adjusts for items that are "significant in nature" and "expected to occur infrequently", according to its Q3 2026 release.
Common adjustments include the following.
- Restructuring costs are often added back.
- Litigation settlements can be excluded.
- Deal costs from acquisitions are another frequent item.
- Gains or losses on asset sales are often removed.
Adjustments are discretionary, and some go far. In its 2018 bond offering, WeWork used a measure called "community-adjusted EBITDA". Axios reported that it excluded company-wide costs such as growth spending and executive salaries. The same documents showed a 2017 net loss of USD 933 million.
| Possible upside of adjusted EBITDA | Possible downside of adjusted EBITDA |
|---|---|
| Shows the recurring earnings trend | Management chooses what to exclude |
| Makes periods easier to compare | "One-off" costs can repeat every year |
| Matches figures often used in loan terms | Definitions differ between companies |
Source: our summary based on the Axios case and Corporate Finance Institute.
How Investors Use EBITDA
EV/EBITDA and the EBITDA Multiple
Enterprise value (EV) equals market capitalisation plus net debt. The enterprise value guide explains the full formula. EV/EBITDA divides that value by EBITDA.
The multiple ignores how a company is funded. That makes it easier to compare firms with different debt levels than the P/E ratio, which is affected by interest costs.
The table below is an illustrative calculation for Ferrari. The share price is an assumed input, chosen for round numbers, and does not represent a market quote.
| Input | Value | Basis |
|---|---|---|
| Assumed share price | EUR 370 | Illustrative input |
| Shares (weighted average, Q3 2026) | 175.73 million | Ferrari Q3 2026 release |
| Market capitalisation | About EUR 65.0 billion | Our calculation |
| Net debt at 30 September 2026 | EUR 1,393 million | Ferrari Q3 2026 release |
| Enterprise value | About EUR 66.4 billion | Our calculation |
| Trailing 12-month EBITDA | EUR 2,930 million | Our calculation |
| EV/EBITDA | About 22.7x | Our calculation |
Source: Ferrari Q3 2026 release and Ferrari FY2025 release. Illustrative calculation made on 10 November 2026 with an assumed share price. It is not a company figure.
Trailing EBITDA combines FY2025 (EUR 2,772 million) with the first nine months of 2026 (EUR 2,230 million), minus the same period of 2025 (EUR 2,072 million). Ferrari's net debt includes its financial services arm. Its industrial business held net cash of EUR 219 million, which would put the multiple near 22.1x.
The multiple moves with the share price, as the next table shows.
| Assumed share price | Enterprise value | EV/EBITDA |
|---|---|---|
| EUR 330 | About EUR 59.4 billion | About 20.3x |
| EUR 370 | About EUR 66.4 billion | About 22.7x |
| EUR 410 | About EUR 73.4 billion | About 25.1x |
Illustrative figures only, based on trailing EBITDA of EUR 2,930 million and net debt of EUR 1,393 million.
Sector context helps when reading a multiple.
| US sector | EV/EBITDA (positive-EBITDA firms) |
|---|---|
| Telecom services | 6.54x |
| Air transport | 7.58x |
| Integrated oil and gas | 8.16x |
| Grocery and food retail | 8.94x |
| General utilities | 13.73x |
| General retail | 17.38x |
| System and application software | 24.48x |
| Semiconductors | 34.75x |
| Total US market | 19.73x |
Source: Aswath Damodaran, NYU Stern, Enterprise Value Multiples by Sector (US), data as of January 2026. Past performance is not a reliable indicator of future results.
A low multiple can mean the market prices a company cheaply relative to its earnings. It may also reflect weak growth or higher risk. A high multiple can signal strong growth expectations, although it can also mean the shares are expensive.
EBITDA is a useful first step in an analysis. Capital spending and working capital still decide how much cash a business keeps.
Net Debt to EBITDA
Net debt to EBITDA = Net debt ÷ EBITDA
The ratio shows roughly how many years of EBITDA would repay net debt. Loan agreements often cap it in a covenant. In an illustrative case, net debt of EUR 350 million against EBITDA of EUR 100 million gives 3.5x, above a 3.0x limit.
| Company | Net debt (EUR million) | Trailing 12-month EBITDA (EUR million) | Ratio |
|---|---|---|---|
| Ferrari | 1,393 | 2,930 | About 0.5x |
| Deutsche Telekom (incl. leases, adjusted EBITDA) | 134,208 | 52,667 | About 2.5x |
Source: Ferrari Q3 2026 release, Ferrari FY2025 release and Deutsche Telekom Q3 2026 release. Net debt at 30 September 2026. Trailing EBITDA and ratios are our calculation, using FY2025 plus the first nine months of 2026 minus the same period of 2025. Past performance is not a reliable indicator of future results.
Higher leverage leaves less room if earnings fall. Telecom groups often carry more debt, partly because their networks tend to produce relatively steady revenue. Lower leverage gives more flexibility, although it can also mean a company uses less debt to fund growth.
Comparing Companies in the Same Industry
EBITDA is most useful between close peers.
- It strips out different tax rates between countries.
- It removes the effect of funding through debt or equity.
- It neutralises different depreciation policies.
- It works best between firms with similar business models.
Investors often pair it with earnings per share and the P/E ratio. The price-to-book ratio adds a balance-sheet view. Together these measures form part of a broader fundamental analysis of stocks.
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Limitations and Criticism of EBITDA
- EBITDA is not defined by IFRS or US GAAP, so definitions differ between companies.
- It ignores capital expenditure, which capital-heavy firms must keep paying.
- It leaves out working capital needs.
- It excludes interest and tax, which are real cash costs.
- Adjusted versions can be stretched, as the WeWork case shows.
The best-known critic is Warren Buffett. He wrote that "References to EBITDA make us shudder" in his 2000 letter to Berkshire Hathaway shareholders. He then asked whether management thinks "the tooth fairy pays for capital expenditures".
| Advantages of EBITDA | Disadvantages of EBITDA |
|---|---|
| Simple to calculate from public accounts | Ignores the cost of replacing assets |
| Helps compare firms with different debt levels | Leaves out interest and tax payments |
| Widely used in valuation and loan terms | Each company defines it in its own way |
Source: Corporate Finance Institute and Wikipedia.
A positive EBITDA does not mean the business generates cash, as Wikipedia points out. A common fix is EBITDA minus capex, which subtracts capital spending.
EBITDA vs Operating Cash Flow
Operating cash flow comes from the cash flow statement. It starts near EBITDA, then deducts cash interest and cash taxes. It also adjusts for changes in working capital. Free cash flow then subtracts capital spending.
| Ferrari FY2025 | EUR million |
|---|---|
| EBITDA | 2,772 |
| Cash flow from operating activities | 2,352 |
| Capital expenditure | (943) |
| Free cash flow | 1,409 |
| Free cash flow as % of EBITDA | About 51% |
Source: Ferrari FY2025 results release. The percentage is our calculation. Past performance is not a reliable indicator of future results.
Only about half of Ferrari's 2025 EBITDA became free cash flow. Capital spending alone absorbed about 34% of it. EBITDA minus capex was EUR 1,829 million.
Deutsche Telekom shows a similar gap. In the first nine months of 2026, its adjusted EBITDA AL was EUR 35,552 million. Its free cash flow AL was EUR 16,417 million, according to its Q3 2026 release. Cash capital spending was EUR 12,644 million.
Frequently Asked Questions
What Does EBITDA Mean in Simple Terms?
It is the profit from running a business, measured before interest and tax and before charges for ageing assets.
Is EBITDA the Same as Profit?
It sits above net profit. Ferrari's 2025 EBITDA was EUR 2,772 million, while net profit was EUR 1,600 million.
What Is a Good EBITDA Margin?
It depends on the sector. US grocers averaged about 5.4% and software firms about 35.9% in January 2026 data.
What Is the Difference Between EBIT and EBITDA?
EBIT deducts depreciation and amortisation. EBITDA adds them back. In Ferrari's Q3 2026 figures, the gap was EUR 190 million.
Why Do Some Investors Criticise EBITDA?
It ignores capital spending and working capital. Definitions also vary between companies, and adjusted versions can flatter results.
What Is a Good EV/EBITDA Ratio?
It depends on growth and risk. In January 2026 data, US telecoms traded near 6.5x and software near 24.5x.
Does EBITDA Include Depreciation?
EBITDA adds depreciation back to profit. The charge is removed because it is a non-cash accounting cost.
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Sources
- What Is EBITDA? Definition, Formula and Examples, Corporate Finance Institute, accessed 10 November 2026.
- Earnings before interest, taxes, depreciation and amortization, Wikipedia, accessed 10 November 2026.
- Strong mix and personalizations sustain Q3 growth and further 2026 guidance upgrade, Ferrari N.V., accessed 10 November 2026.
- Ferrari FY 2025 Results Press Release, Ferrari N.V., accessed 10 November 2026.
- Margins by Sector (US), Aswath Damodaran, NYU Stern, accessed 10 November 2026.
- Enterprise Value Multiples by Sector (US), Aswath Damodaran, NYU Stern, accessed 10 November 2026.
- More growth, raised guidance, record dividend, Deutsche Telekom, accessed 10 November 2026.
- Digging into WeWork's new financial metric, Axios, accessed 10 November 2026.
- Chairman's Letter 2000, Berkshire Hathaway, accessed 10 November 2026.
