EBITDA

In French, it is often compared to Gross Operating Surplus (GOS), even though the two concepts are not exactly equivalent. EBITDA is used to assess a company’s ability to generate profits from its core operations, regardless of its financing structure, tax treatment, or certain accounting policies. It is one of the most widely used metrics in private equity to analyze a company’s economic quality and determine its valuation.

Is EBITDA important?

When an investor analyzes a company, they seek to understand its ability to create value through its operations.

EBITDA is particularly useful because it allows you to:

• To compare companies operating in different countries or under different tax regimes;
• To analyze operating profitability independently of the level of debt;
• To assess changes in performance over time;
• To serve as a benchmark for valuations and M&A transactions.

In private equity, EBITDA is often one of the key metrics tracked by investors and executives.

How do you calculate EBITDA?

EBITDA can be calculated based on operating income.

The simplified formula is:

EBITDA = Operating income + Depreciation and amortization + Impairment losses

The goal is to eliminate factors that do not directly reflect the company’s operational performance.

Simplified example

A company reports the following results:

• Revenue: €50 million
• Operating expenses: €40 million
• Depreciation and amortization: €3 million

Its operating income is:

€50 million - €40 million - €3 million = €7 million

EBITDA is therefore:

€7 million + €3 million = €10 million

The company therefore generates an EBITDA of €10 million.

EBITDA and Company Valuation

EBITDA plays a central role in the valuation of private companies.

Investors frequently use EBITDA multiples to estimate a company's value.

Example

If a company generates €10 million in EBITDA and comparable companies are valued at 12 times their EBITDA:

Enterprise value = €10 million × 12 = €120 million

This approach is widely used in private equity transactions, mergers and acquisitions, and business transfers.

EBITDA and Private Equity

In private equity, EBITDA is often a key indicator of value creation.

Funds generally aim to support companies in order to:

Increase their business

Business development helps increase revenue and, potentially, EBITDA.

Improving profitability

Optimizing processes, costs, or organizational structure can help improve operational performance.

Perform build-up

Complementary acquisitions can sometimes generate synergies and increase the group’s consolidated EBITDA.

Changes in EBITDA are therefore one of the key indicators used to measure progress made during the investment period.

EBITDA and net income: What's the difference?

These two indicators serve different purposes.

EBITDA

It measures the business unit's operational performance.

Net income

It includes all of the company's expenses and revenues, including:

• Financial interests;
• Taxes;
• Depreciation;
• Extraordinary items.

Net income therefore reflects the final profit attributable to shareholders, while EBITDA focuses on the company’s ability to generate profits from its operations.

The Limitations of EBITDA

Although it is widely used, EBITDA has certain limitations.

It does not measure available cash

A company can report high EBITDA while still having significant investment or working capital needs.

It does not take debt into account

Two companies with the same EBITDA may have very different financial situations depending on their level of debt.

It does not reflect overall profitability

EBITDA should be analyzed in conjunction with other financial indicators to gain a comprehensive understanding of the company’s financial position.

EBITDA History

1970s–1980s: Expansion of LBO

EBITDA is gradually becoming a key metric for assessing a company’s ability to repay its debt.

Growth of Private Equity

As the private equity market grows, EBITDA has become the standard metric for valuation and performance tracking.

Today

It remains one of the most widely used financial metrics in private equity, mergers and acquisitions, and corporate finance transactions.

FAQ

What does EBITDA stand for?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

Why is EBITDA used in private equity?

It is used to assess a company’s operational performance and is frequently used as a benchmark for its valuation.

Does a high EBITDA mean that a company is profitable?

Not necessarily. EBITDA does not take into account certain key factors such as capital expenditures, debt, or taxes. It should be analyzed in conjunction with other financial metrics.

Disclaimer: Investing involves the risk of capital loss. Past performance is not indicative of future results. The information presented in this article is intended solely for educational and informational purposes. It does not constitute investment advice or a recommendation to buy or sell any financial instrument.

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