EBITDA Explained in Simple Words: What It Is, Why It Matters, and How to Use It

What is EBITDA

Let’s Start With a Simple Story

Imagine you own a small bakery. Every morning, you wake up early to bake fresh bread, cookies, and cakes. People love your treats, and you start making good money.

Now, you're wondering — “Am I really making a profit?”

You’ve got bills to pay — rent for your shop, wages for your helper, electricity, flour, sugar, and other ingredients. Plus, the bank loan you took to buy that fancy oven also adds to your monthly costs.

Wouldn’t it be helpful to know exactly how much your bakery earns from just baking and selling — before worrying about loans, taxes, or depreciation?

That’s where EBITDA comes in.

What is EBITDA?

EBITDA stands for:

• Earnings

• Before

• Interest

• Taxes

• Depreciation

• Amortization

In simple words, EBITDA is a number that tells you how much money your business makes from its main activities — without counting certain expenses like loans or taxes.

It’s like saying: “Let’s just look at the money my bakery earns from baking and selling cakes, before I deal with the rest.”

Why is EBITDA Important for Businesses?

Let’s go back to your bakery.

You’re doing well and thinking of expanding. Maybe a second shop in another neighborhood? Or maybe you want to take a loan from a bank to upgrade your kitchen.

But before someone gives you money (like investors or banks), they’ll ask:

“How profitable is your business?”

That’s where EBITDA becomes a helpful tool.

1. Shows Core Business Strength

EBITDA shows how well your main business is doing — not distracted by interest, taxes, or equipment age.

For example:

If your bakery earns ₹1,00,000 every month, and after removing flour cost, rent, and salaries, you’re left with ₹40,000 — that’s your EBITDA.

Now even if your old oven is losing value (depreciation) or you pay interest on a bank loan, EBITDA will focus only on how well your bakery is running.

2. Helps Investors Understand Profitability

If someone wants to invest in your bakery, they don’t just care about your loan or tax bill. They want to know:

“If I gave this person more money, can they grow and earn more?”

EBITDA helps them see your business’s real earning potential.

3. Easy Comparison Between Companies

Let’s say your bakery and a nearby café both want investors. Even though your expenses may be different, comparing EBITDA gives a fair idea of which one earns better from their core operations.

So, EBITDA is like a scorecard — it tells how much money a company is making from its regular work.

How is EBITDA Calculated?

Don’t worry, this part sounds technical, but we’ll make it super easy.

Step 1: Start With Revenue

Revenue means total money your business earns from selling products or services.

Let’s say your bakery earns ₹1,00,000 a month.

Step 2: Subtract the Cost of Goods Sold (COGS)

This includes the cost of ingredients and things used directly to make your products. Like flour, sugar, milk, chocolate, etc.

Suppose ingredients cost ₹30,000.

Now you’re left with:₹1,00,000 - ₹30,000 = ₹70,000

Step 3: Subtract Operating Expenses

Operating expenses are day-to-day running costs, like:

• Shop rent

• Helper’s salary

• Electricity

• Delivery charges

Let’s say this is ₹25,000.

Now you have:₹70,000 - ₹25,000 = ₹45,000

That ₹45,000 is your EBITDA.

Simple, right?

You didn’t subtract:

• Interest on loans

• Taxes you owe

• Depreciation of your oven

• Amortization of any software or licenses

EBITDA skips those to focus only on real business earnings.

Let’s Break Down the Words One by One

1. Earnings

This is the money left after paying costs of making your product but before paying other stuff like interest or taxes.

2. Before Interest

Interest is the money you pay if you took a loan. EBITDA doesn’t count this because not all companies take loans. It helps in comparing businesses more fairly.

3. Before Taxes

Every business pays taxes, but tax rates can differ by location or company structure. EBITDA ignores taxes for a more neutral view.

4. Before Depreciation

Let’s say your oven was ₹1,00,000 and will last 5 years. Every year, it loses value. That’s depreciation. But since it’s not cash going out, EBITDA leaves it out.

5. Before Amortization

This is like depreciation, but for non-physical things — like a software license or a trademark.

Who Uses EBITDA and Why?

✅ Business Owners

To know how strong their operations are and plan future growth.

✅ Investors

To decide if a company is worth investing in. A high EBITDA can mean strong potential.

✅ Banks or Lenders

To check if a company can repay its loans. Strong EBITDA = better loan approval chances.

✅ Managers

To track performance and spot areas that need improvement.

When is EBITDA Not Enough?

Let’s be honest — EBITDA is useful, but not perfect.

Here are a few things it doesn’t show:

1. Real Profit After Taxes and Interest EBITDA may look good, but a business still needs to pay taxes, loans, and other bills.

2. Cash Flow A company may have a strong EBITDA but poor cash management. That’s dangerous.

3. Debt Level EBITDA doesn’t tell you if a company is drowning in debt.

So always combine EBITDA with other numbers like net income, cash flow, and debt ratio for a full picture.

A Real-World Example

Let’s say there are two bakeries:

Detail	Bakery A	Bakery B
Revenue	₹2,00,000	₹2,00,000
Ingredients & Staff	₹1,20,000	₹1,10,000
Operating Cost	₹30,000	₹50,000
EBITDA	₹50,000	₹40,000

Even though both earn the same revenue, Bakery A has a higher EBITDA, which means it's more efficient.

Conclusion: Think of EBITDA as a Health Check-Up for Your Business

Just like you go to a doctor for a health check-up, EBITDA tells you how healthy your business is.

It shows:

• Are you earning well from your main work?

• Are your costs under control?

• Can you grow and attract investment?

Whether you’re running a bakery, freelancing, or managing a startup — knowing your EBITDA helps you make better decisions.

So next time someone talks about business profits, taxes, or earnings — smile and say,

“Yes, I understand EBITDA. It’s my business’s report card!”