Metric Explainer: EBITDA
How much money the core business operations generate, before accounting for depreciation, interest on loans, and taxes. "EBITDA batata hai ki company ka actu...
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Simple definition
How much money the core business operations generate, before accounting for depreciation, interest on loans, and taxes.
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"EBITDA batata hai ki company ka actual dhanda kitna kamaata hai — bina interest, tax, aur depreciation ko count kiye."
Why it matters
- Best proxy for operating cash generation — strips out accounting choices and capital structure
- Capital structure neutral — ignores how the business is funded (debt vs equity)
- Used in EV/EBITDA — the most popular valuation multiple globally
- Comparable across companies — not distorted by different depreciation policies or tax rates
Formula
EBITDA = Revenue − Operating Expenses (excl. D&A)
OR (bottom-up):
EBITDA = PAT + Tax + Interest + Depreciation & Amortisation
How to calculate (step by step)
| Step | Source | Example (TCS) |
|---|---|---|
| 1. PAT | P&L bottom line | ₹42,000 Cr |
| 2. + Income Tax | P&L | ₹14,500 Cr |
| 3. + Interest/Finance costs | P&L | ₹500 Cr |
| 4. + Depreciation & Amortisation | P&L | ₹5,000 Cr |
| 5. EBITDA | Sum of above | ₹62,000 Cr |
EBITDA vs Operating Profit (EBIT)
Revenue
Gross Profit
EBITDA
minus D&AEBIT / Operating Profit
minus InterestPBT
minus TaxPAT
| Metric | Includes D&A? | Includes Interest? | Includes Tax? |
|---|---|---|---|
| EBITDA | No | No | No |
| EBIT | Yes | No | No |
| PBT | Yes | Yes | No |
| PAT | Yes | Yes | Yes |
Sector context
| Sector | Typical EBITDA Margin | Notes |
|---|---|---|
| IT Services | 25–30% | People-cost heavy |
| FMCG | 20–28% | Brand + distribution advantage |
| Pharma | 20–30% | R&D costs are the swing factor |
| Auto OEM | 10–15% | Capital-intensive, competitive |
| Steel | 12–25% | Highly cyclical with commodity prices |
| Telecom | 35–50% | High fixed costs, high margins |
Common mistakes
Mistakes to avoid
- Treating EBITDA as cash flow — EBITDA ignores capex, working capital changes, and tax. It overstates actual cash for capital-heavy businesses
- "EBITDA is not a GAAP/IndAS metric" — It's calculated, not reported. Different companies may calculate it differently (especially around Other Income)
- Adjusted EBITDA abuse — Companies sometimes add back stock compensation, restructuring costs, and other items to inflate "adjusted EBITDA"
- Ignoring lease costs — Under IndAS 116, lease costs are reclassified from opex to D&A + interest, inflating EBITDA
Real example: Why EBITDA beats PAT for comparison
| Metric | Company A (Debt-free) | Company B (Leveraged) |
|---|---|---|
| Revenue | ₹1,000 Cr | ₹1,000 Cr |
| EBITDA | ₹200 Cr | ₹200 Cr |
| Interest | ₹0 | ₹80 Cr |
| PAT | ₹145 Cr | ₹85 Cr |
Both companies have identical operating performance (same EBITDA). Company B looks worse on PAT only because it chose debt financing. EBITDA reveals they're equally good operators.
Red flags
- Negative EBITDA — the core business is losing money before even D&A and interest
- Large gap between EBITDA and CFO — working capital may be consuming cash
- EBITDA growing but PAT declining — interest costs or depreciation eating into profits
- "Adjusted EBITDA" significantly higher than reported — check what's being excluded
Related metrics
- EBITDA Margin — EBITDA as % of revenue
- EBIT — EBITDA minus depreciation
- EV/EBITDA — Key valuation multiple using this metric
- CFO — The actual cash version of EBITDA