EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Businesses, investors, lenders, and analysts often use it as a supplemental measure to compare earnings before the effects of financing, income taxes, depreciation, and amortization.
A common starting formula is:
EBITDA = Net Income + Interest + Income Taxes + Depreciation + Amortization
However, EBITDA should not be confused with cash flow, net profit, or a standardized IFRS profit measure.
Its usefulness also depends on how consistently it is calculated. The U.S. SEC, for example, defines conventional EBITDA from net income by adding interest, taxes, depreciation, and amortization and warns that measures calculated differently should be labelled distinctly, such as “Adjusted EBITDA.” (SEC guidance on EBITDA)
For companies applying IFRS, this distinction becomes even more relevant with IFRS 18 Presentation and Disclosure in Financial Statements, which becomes effective from January 1, 2027 and introduces defined operating-profit subtotals plus disclosure requirements for qualifying management-defined performance measures.
This guide explains how EBITDA is calculated, how to interpret EBITDA margin and leverage ratios, how EBITDA differs from EBIT and EBT, and where the metric can become misleading.
EBITDA measures earnings before four categories:
Removing interest can make companies with different financing structures easier to compare, while removing depreciation and amortization can reduce differences created by the age and accounting carrying amounts of long-term assets.
But EBITDA does not remove every difference between businesses.
Companies can still differ because of:
This is why EBITDA is most useful when comparing similar businesses using consistently defined calculations.
It is also important to distinguish ordinary EBITDA from Adjusted EBITDA. When additional items such as restructuring charges, acquisition costs, impairments, share-based compensation, or other expenses are excluded, the resulting measure may no longer be conventional EBITDA.
The SEC’s non-GAAP guidance specifically notes that a measure calculated differently from conventional EBITDA should be labelled accordingly rather than simply called EBITDA.
Also Read: Why Accounting Matters for Business Success
With an understanding of EBITDA, let’s now look at how this metric is calculated.
EBITDA = Operating Income + Depreciation + Amortization + Interest + Taxes
There are two common ways to calculate EBITDA.
EBITDA = Net Income + Interest Expense + Income Tax Expense + Depreciation + Amortization
This is the conventional approach reflected in the SEC’s guidance on EBITDA.
If you already have earnings before interest and tax:
EBITDA = EBIT + Depreciation + Amortization
Do not add interest and tax again when the starting amount already excludes them.
Assume a Saudi business reports the following figures for one financial year:
The calculation is:
EBITDA = 1,500,000 + 200,000 + 400,000 + 300,000 + 100,000
EBITDA = SAR 2,500,000
This does not mean the company generated SAR 2.5 million of cash.
The business may still need cash for:
EBITDA should therefore be interpreted alongside the company’s profit, cash-flow statement, balance sheet, debt, and capital expenditure.
Do not describe these inputs as a “snapshot from the balance sheet.” Net income, interest, tax, depreciation, and amortization are period-based performance figures, not point-in-time balance-sheet amounts. Let’s now explore what EBITDA actually reveals about a company’s financial health and operational efficiency.
EBITDA can help answer several useful questions, but it should not be treated as a complete measure of financial health.
EBITDA can help compare earnings before financing costs, income taxes, depreciation, and amortization.
This can be particularly useful when comparing similar companies with different debt structures or asset ages.
EBITDA and EBITDA margin are commonly used to compare businesses within the same industry.
The comparison is more meaningful when companies use similar definitions and have comparable business models.
Lenders and analysts may compare debt with EBITDA when evaluating leverage or covenant headroom.
However, lending agreements frequently define their own Adjusted EBITDA, so the covenant calculation can differ substantially from ordinary accounting EBITDA. The SEC’s non-GAAP guidance specifically discusses Adjusted EBITDA used in credit-agreement covenants.
EBITDA does not directly show:
A high EBITDA can therefore coexist with weak cash flow or a highly leveraged balance sheet.
For a current Saudi example, stc group’s 2025 Annual Report reports SAR 24.47 billion of EBITDA, with 6.1% year-over-year growth after excluding specified non-recurring items.
The example demonstrates how a listed Saudi company uses EBITDA as a performance measure alongside revenue, operating profit, net profit, cash flow, and other financial information.
It should not be used to claim that focusing on EBITDA itself caused the improvement.
EBITDA should not be used as the basis for planning Saudi VAT obligations.
VAT is governed by the tax treatment and timing of transactions, not by a company’s EBITDA. Likewise, income-tax and Zakat calculations have their own applicable rules.
Now that we’ve explored EBITDA’s significance, let’s look at how it compares to other financial metrics, such as EBIT and EBT, to gain a broader perspective on profitability.
EBITDA removes interest, income tax, depreciation, and amortization from earnings.
EBIT retains depreciation and amortization but excludes interest and income tax.
It should not automatically be assumed that every company’s self-labelled “EBIT” is identical to IFRS operating profit.
EBT reflects earnings after financing costs but before income-tax expense.
The best metric depends on the question being asked. EBITDA can help with certain operating comparisons, while EBIT retains the cost allocation associated with depreciable and amortizable assets, and EBT also captures financing costs.
Also Read: Financial Accounting Made Simple: Principles, Types, and Key Functions
Let’s move on to understanding EBITDA margin, which helps evaluate a company's operating efficiency further.
EBITDA Margin = (Revenue / EBITDA) × 10
EBITDA margin expresses EBITDA as a percentage of revenue.
EBITDA Margin = (EBITDA ÷ Revenue) × 100
For example:
EBITDA Margin = (600,000 ÷ 6,000,000) × 100 = 10%
EBITDA Margin = (750,000 ÷ 9,000,000) × 100 = 8.33%
Company B generates more EBITDA in absolute terms, but Company A has the higher EBITDA margin.
That means Company A produces more EBITDA for every riyal of revenue under the calculations shown.
A higher margin is not automatically evidence that one company is a better investment. Debt, capital expenditure, growth, cash conversion, asset requirements, accounting policies, and valuation also matter.
While margin highlights earnings efficiency, investors and lenders also want to know if those earnings can cover debt. This is where the EBITDA coverage ratio becomes essential.
EBITDA Coverage Ratio = Total Debt / EBITDA
Several different ratios use EBITDA. They should not be treated as interchangeable.
Debt-to-EBITDA = Total Debt ÷ EBITDA
This is a leverage ratio, not a coverage ratio.
For example:
Debt-to-EBITDA = 4.0×
In general, a higher Debt/EBITDA ratio means more debt relative to EBITDA, although acceptable levels vary substantially by industry, business stability, lender requirements, and the definition of debt and EBITDA being used.
A simple interest-coverage measure can be expressed as:
EBITDA-to-Interest = EBITDA ÷ Interest Expense
For example:
EBITDA-to-Interest = 5.0×
A higher ratio means more EBITDA exists relative to interest expense.
However, EBITDA is not cash flow and this ratio does not account for principal repayments, capital expenditure, working-capital requirements, or other cash obligations.
Debt-service coverage and fixed-charge coverage are different measures and can include principal repayments, lease obligations, interest, or other fixed payments.
Their formulas vary depending on the lender and credit agreement.
Do not label a custom lender formula as a universal “EBITDA coverage ratio.” When a lending covenant uses Adjusted EBITDA, use the definition in the actual agreement and reconcile it to the company’s reported figures where appropriate. The SEC’s non-GAAP guidance specifically recognizes that credit agreements can define their own Adjusted EBITDA covenant measures.
While coverage ratios assess debt-servicing strength, understanding the broader pros and cons of EBITDA is key to using it effectively in financial analysis and decision-making.
EBITDA should therefore complement—not replace—net profit, operating profit, operating cash flow, free cash flow, debt, and balance-sheet analysis.
The SEC similarly warns that non-GAAP measures can become misleading when adjustments or labels do not accurately describe the measure being presented. (SEC Non-GAAP Financial Measures)
Also Read: Best Accounting Software For Your Online Retail Business
IFRS 18 Presentation and Disclosure in Financial Statements becomes effective for annual reporting periods beginning on or after January 1, 2027, with earlier application permitted.
The new standard introduces defined subtotals including:
It also introduces disclosure requirements for qualifying management-defined performance measures used in public communications to communicate management’s view of financial performance.
This matters for companies that publicly communicate company-specific EBITDA or Adjusted EBITDA measures.
A business should clearly document:
IFRS 18 does not make EBITDA a replacement for the required IFRS profit subtotals.
For Saudi companies applying full IFRS, finance teams should therefore use 2026 to review how alternative performance measures are calculated, labelled, reconciled, and communicated before IFRS 18 becomes effective.
EBITDA depends on reliable underlying accounting data.
Finance teams need accurate figures for:
HAL Accounting currently documents several capabilities that can support that underlying financial-reporting process, including:
These functions can help finance teams maintain the records from which EBITDA and related ratios are calculated.
However, HAL should not currently be described as automatically calculating, tracking, or interpreting EBITDA unless the product team provides current documentation for a dedicated EBITDA report or KPI.
The calculation also remains the responsibility of finance teams because organizations may distinguish between conventional EBITDA and company-specific Adjusted EBITDA.
EBITDA is useful because it provides a supplemental view of earnings before interest, income taxes, depreciation, and amortization.
But it should not be mistaken for cash flow, net profit, or a complete measure of financial health.
A sound EBITDA analysis should consider the metric alongside:
Businesses should also use the correct formulas. Conventional EBITDA can be calculated from net income by adding back interest, income taxes, depreciation, and amortization, consistent with the definition discussed in the SEC’s EBITDA guidance.
For companies applying full IFRS, IFRS 18 also makes the presentation of company-specific performance measures increasingly relevant from 2027, alongside its new defined profit subtotals.
HAL Accounting can support the underlying finance process through automated journal entries, ledger controls, bank reconciliation, dashboards, transaction analytics, and customizable reporting.
These capabilities help keep the source financial information organized, while finance teams remain responsible for defining, calculating, and interpreting EBITDA correctly.
Businesses evaluating HAL’s finance workflows can book a HAL ERP demo.
A common formula is:
EBITDA = Net Income + Interest + Income Taxes + Depreciation + Amortization
If starting from EBIT:
EBITDA = EBIT + Depreciation + Amortization
Do not add interest and tax again when the starting figure already excludes them.
EBITDA Margin = EBITDA ÷ Revenue × 100
For example, SAR 1 million of EBITDA on SAR 10 million of revenue produces a 10% EBITDA margin.
No.
EBITDA does not reflect working-capital changes, capital expenditure, debt principal repayments, and several other cash movements.
Generally, no.
Because:
Debt-to-EBITDA = Total Debt ÷ EBITDA
a higher ratio normally means there is more debt relative to EBITDA. The appropriate level depends on the business, industry, lender, and covenant definition.
Conventional EBITDA adds back interest, income tax, depreciation, and amortization.
Adjusted EBITDA makes additional company-specific adjustments. Those adjustments should be clearly explained because different companies may calculate Adjusted EBITDA differently. The SEC specifically warns that non-GAAP measures can become misleading when their labels or adjustments do not accurately represent the measure.
No.
EBITDA is a performance measure. VAT and Zakat are determined under their own applicable Saudi rules and should not be calculated simply from EBITDA.
IFRS 18 introduces new required profit subtotals and disclosure requirements for qualifying management-defined performance measures from 2027. A company that publicly uses a company-specific EBITDA or Adjusted EBITDA measure should therefore assess the IFRS 18 requirements applicable to that measure.
I could verify that HAL Accounting provides accounting records, dashboards, transaction analytics, reports, automated journal entries, and bank reconciliation.
I could not verify a dedicated public EBITDA calculation/report feature, so the article should not currently make that claim.
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