As a small business owner, you’re constantly balancing priorities — serving customers, managing employees, and making sure your company turns a profit. But when it comes to evaluating the true performance of your business, one metric stands out: EBITDA.
If you’ve ever found yourself confused by complicated income statements or wondering how your business stacks up against competitors, understanding EBITDA can offer the clarity you need.
In this blog, we’ll break down:
- What EBITDA actually is
- Why it matters for small businesses
- How to calculate it
- When and why to use it
- A real-world example
- Where to turn for help
What Is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
At first glance, it might seem like a mouthful. But the concept is simple: EBITDA shows how much profit your business generates from its core operations, before the impact of:
- Interest (financing decisions)
- Taxes (government obligations)
- Depreciation (wear-and-tear on equipment and property)
- Amortization (non-cash write-downs on intangible assets)
By focusing strictly on operational income, EBITDA gives you and others a cleaner look at how efficiently your business is really running.
How Do You Calculate EBITDA?
Calculating EBITDA might sound complex at first, but it’s actually quite straightforward — especially once you know where to find the numbers.
Start with your Net Income, then add back the following four items:
- Interest – the cost of any business loans or lines of credit
- Taxes – what your business paid in income or corporate taxes
- Depreciation – the reduction in value of physical assets like vehicles or machinery
- Amortization – similar to depreciation, but for intangible assets like software or patents
The formula looks like this:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
All of these values can be found on your income statement or cash flow statement, typically prepared monthly, quarterly, or annually by your accountant or bookkeeping software.
Here’s a simple example:
Let’s say your business reported the following last year:
- Net Income: $60,000
- Interest on loans: $10,000
- Taxes paid: $15,000
- Depreciation on equipment: $8,000
- Amortization of software licenses: $7,000
You’d calculate EBITDA like this:
$60,000 + $10,000 + $15,000 + $8,000 + $7,000 = $100,000
Your EBITDA is $100,000 — a much stronger reflection of your operating earnings than the $60,000 net income figure alone.
If your income statement doesn’t list depreciation or amortization separately, check your cash flow statement under “Adjustments for Non-Cash Expenses.” This is where these figures are often included.
If you’re using QuickBooks, Xero, or a similar platform, these reports can usually be generated with just a few clicks — and we can help make sure they’re set up to show what you need.
Why EBITDA Matters for Your Business
It Reveals Operational Efficiency
EBITDA strips away the “noise” of financing, tax strategy, and accounting rules. What’s left? A clear view of how well your business generates profits from its daily operations.
That insight helps you make smarter decisions. Are your margins too thin? Is overhead dragging down your profits? EBITDA shines a spotlight on inefficiencies that might otherwise be hidden.
It’s Key for Loans, Investments, & Valuation
If you’re seeking funding — or plan to sell your business — lenders and investors will absolutely look at your EBITDA.
Why? Because it shows whether your company can generate enough cash to cover operating costs and eventually repay debts or deliver returns. A strong EBITDA reassures others that your business is a safe and smart investment.
In fact, business valuations often use EBITDA multiples to estimate what your company is worth on the open market.
It Supports Smarter Internal Strategy
EBITDA isn’t just for external stakeholders — it’s a powerful internal compass. You can use it to:
- Track profit performance across time
- Compare your business to competitors or industry benchmarks
- Guide decisions about pricing, staffing, and scaling
- Focus efforts on what truly drives profitability
A Real-World Example: When EBITDA Makes a Difference
Imagine Jake owns a successful family-run HVAC business. Over the past few years, Jake has reinvested profits into new trucks, better equipment, and updated software. The business is busy — but the net income appears lower than expected.
Jake’s income statement shows:
- Net Income: $90,000
- Interest on equipment loans: $18,000
- Taxes: $22,000
- Depreciation: $28,000
- Amortization of software: $12,000
Jake calculates his EBITDA:
$90,000 + $18,000 + $22,000 + $28,000 + $12,000 = $170,000
Now he sees the true strength of his operations — his business is generating $170,000 in operating profit before all those non-core costs are factored in.
This clarity allows Jake to:
- Justify his pricing model
- Show lenders he’s operating profitably
- Know where to cut costs if needed
- Make data-backed decisions about hiring and growth
Without calculating EBITDA, he might have underestimated his business’s health — or made poor decisions based on misleading numbers.
What’s a “Good” EBITDA?
That depends on your industry. Manufacturing companies may have larger EBITDA margins because of their high equipment costs, while service businesses may have lower EBITDA margins but better cash flow.
That’s why benchmarking against similar businesses is key. EBITDA also becomes more useful when tracked over time — are you improving, staying steady, or trending downward?
For a deeper understanding, you can explore this resource from Investopedia: What is EBITDA?
Moving Forward with Confidence
Understanding your financial performance isn’t just for accountants and analysts — it’s for business owners who want to grow smarter, make informed decisions, and stay competitive in today’s fast-paced environment.
EBITDA gives you a clear view of your business’s operational success. It cuts through the clutter and helps you stay focused on what truly matters: running a business that’s strong, sustainable, and profitable.
Whether you’re planning to expand, attract investors, or simply improve day-to-day decision-making, tracking EBITDA is one of the smartest steps you can take.
How We Can Help You Interpret & Apply Your Metrics
At J.R. Martin & Associates, we help business owners move beyond guesswork. Whether you’re preparing to expand, apply for a loan, or simply want to get a better handle on your books.
If you’re not currently tracking EBITDA — or not sure how to interpret the results — we’re here to help you make sense of your numbers and turn them into actionable insights.
To learn more, schedule a consultation today.
