EBITDA: what the business earns before depreciation
EBITDA adds depreciation back to operating profit. Depreciation spreads the cost of equipment already bought over the years and uses no cash in the year, so EBITDA gives a rough size of the cash the core business generates. Banks use it widely to judge capacity to repay.
Formulas
- EBITDA ≈ operating profit + depreciation
- EBITDA margin = EBITDA ÷ revenue
- Net debt to EBITDA = (borrowings − cash) ÷ EBITDA
The textbook definition is earnings before interest, tax, depreciation and amortisation. Amortisation is hard to separate from the statements alone, so Caveat approximates EBITDA as operating profit plus depreciation.
Worked example
Figures in units of 100 million KRW: operating profit 3.2, depreciation 0.9, borrowings 4.5, cash 1.5 (net debt 3) (values calculated by the Caveat engine).
| Measure | Prior year | Current year |
|---|---|---|
| EBITDA | 3 | 4.1 |
| EBITDA margin | 10.9% | 13.7% |
| Net debt to EBITDA | 1.22x | 0.73x |
At the current rate, debt net of cash could be repaid with about 0.73 years of EBITDA.
How to read it
- Net debt to EBITDA: lower means a lighter debt load. Loan agreements often cap this ratio, so it is worth knowing before talking to the bank. It turns negative when cash exceeds borrowings.
- The gap to operating profit: a wide gap means an equipment-heavy business, and that equipment will need replacing.
Both sides: EBITDA comes before equipment replacement, working capital, interest and tax, so it is always larger than the cash actually kept. The heavier the investment, the better EBITDA flatters. Read it with free cash flow.
Limitations
- Not calculated when depreciation is not shown separately in the statements.
- An approximation that excludes amortisation and non-operating items.
- Net debt is a balance-sheet-date snapshot and can differ from borrowing during the year.
- For reference only; it does not replace credit, investment or tax decisions.
See it in your own statements
Upload a balance sheet and income statement and Caveat calculates these for your company.
FAQ
- Is EBITDA the same as cash flow?
- No. It ignores working capital, capital spending, interest and tax, so it exceeds actual cash flow. Treat it as a rough upper bound.
- What net debt to EBITDA is reasonable?
- It depends on the industry and interest rates. Loan agreements often set a cap, so your bank's threshold is the most relevant benchmark.
- What does negative net debt mean?
- Cash exceeds borrowings: all debt could be repaid with cash to spare.
- Which figures are needed?
- Operating profit, depreciation, revenue, borrowings and cash and cash equivalents.