What is EBITDA: Definition, Formula and Practical Example [2026]

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) is a company's profit before deducting debt interest, taxes, depreciation and amortisation. It represents a company's ability to generate money from its ordinary activities, regardless of its financial structure or tax regime.

For a business owner, EBITDA answers an essential question: how much money does my business generate by itself? By eliminating items that depend on financial decisions (how you finance), tax decisions (where you pay tax) and accounting decisions (how you depreciate), EBITDA allows companies of different sizes, sectors and countries to be compared on equal terms.

87%

of M&A transactions in the European mid-market use EBITDA as the primary valuation metric, according to the Argos Index report by Epsilon Research (Q4 2024).

In the context of mergers and acquisitions transactions, EBITDA is probably the most widely used metric for valuing companies. When a buyer or private equity fund analyses a company, the first thing they look at is its EBITDA, because valuation multiples are applied to it to determine the purchase price.

"EBITDA is the starting point of any price conversation in M&A. But what really determines value is adjusted EBITDA: that's where the negotiation is won or lost."

— Samuel Navarro, founding partner of Capittal Transacciones

What EBITDA is used for: 3 fundamental uses

EBITDA has three fundamental uses that every business owner, finance director or investor should know.

1. Company valuation tool

The most common method for valuing a company in the mid-market is to apply a multiple to EBITDA. According to Dealsuite data for the first half of 2025, the median EV/EBITDA multiple in Spain was 5.4x for transactions between €1 and €20 million Enterprise Value. If your company generates EBITDA of €2 million, the indicative value would be approximately €10.8 million.

2. Operating profitability indicator

By isolating the business activity result, you can compare your profitability with direct competitors or the sector average, without distortion from factors such as debt levels or depreciation decisions.

3. Cash generation proxy

Although EBITDA is not exactly free cash flow (it doesn't capture capital investments or working capital variations), it does give a first approximation of how much cash the business produces. This is crucial for evaluating debt repayment capacity in leveraged buyout (LBO) transactions.

EBITDA formula: how to calculate it step by step

The EBITDA formula can be approached in two equivalent ways that should always give the same result.

Method	Formula	Starting point
Direct (bottom-up)	Net Profit + Taxes + Interest + Depreciation + Amortisation	Last line P&L
Indirect (top-down)	Operating Revenue − Operating Expenses (excluding D&A)	First line P&L

The direct method starts from net profit (the last line of the income statement) and adds back the items we want to exclude. The indirect method starts from operating revenue and subtracts only cash operating expenses. To calculate it correctly, you need your company's profit and loss account, available in the annual accounts filed at the Companies House.

Practical EBITDA calculation example

Let's assume a Spanish industrial company with the following annual data:

Concept	Amount
Operating revenue	€8,000,000
Cost of sales	−€4,800,000
Staff costs	−€1,200,000
Other operating expenses	−€600,000
Depreciation and amortisation	−€400,000
Financial expenses (interest)	−€150,000
Corporation tax	−€212,500
NET PROFIT	€637,500

Top-down calculation: EBITDA = €8,000,000 − €4,800,000 − €1,200,000 − €600,000 = €1,400,000

Bottom-up verification: EBITDA = €637,500 + €212,500 + €150,000 + €400,000 = €1,400,000

With an average industrial sector multiple in Spain of between 5x and 7x (according to the Argos Index Epsilon Research report, Q4 2024), this company would have an indicative Enterprise Value of between €7 and €9.8 million.

Difference between EBITDA, EBIT and net profit

EBITDA, EBIT and net profit measure profitability at three different levels of the income statement. Understanding the difference is fundamental to correctly interpreting company valuation.

Metric	What it includes	What it excludes	Main use
Net profit	All expenses	Nothing	Final result for shareholders
EBIT	Operating expenses + D&A	Interest + Taxes	Compare companies with different debt
EBITDA	Only cash operating expenses	Interest + Taxes + D&A	M&A valuation, sector comparison

In practice, sophisticated buyers don't stop at reported EBITDA. They calculate adjusted or normalised EBITDA, eliminating extraordinary items (litigation, redundancies, non-recurring expenses) and adding the savings the buyer expects to obtain (synergies). This adjusted EBITDA is what is actually multiplied to set the price.

"Two companies with the same reported EBITDA can have very different valuations. The key is in the adjustments: the owner's market salary, personal expenses charged to the company, related party rents... That's where 20% of the price is won or lost."

— Samuel Navarro, Capittal Transacciones

What is good EBITDA: margins by sector in Spain

There is no "good" EBITDA in absolute terms: it depends on the sector, company size and growth phase. What can be measured is the EBITDA margin, which expresses EBITDA as a percentage of revenue.

Sector	Typical EBITDA margin	Source
Software / SaaS	20% − 40%	Dealsuite Mid-Market Monitor 2025
Manufacturing industry	8% − 15%	Bank of Spain, Central de Balances 2024
Distribution and retail	3% − 8%	Bank of Spain, Central de Balances 2024
Professional services	15% − 25%	Dealsuite Mid-Market Monitor 2025
Private security	10% − 18%	Capittal Transacciones internal analysis
Food and beverages	8% − 14%	FIAB / Sector report 2024

For a company sale transaction, what matters is not only the current margin but its trend. Growing EBITDA over the last three to five years sends a very positive signal to the buyer. Stagnant or declining EBITDA, even if high in absolute terms, generates concern and reduces the multiples the market is willing to pay.

5.4x

Median EV/EBITDA multiple in Spain for mid-market transactions (€1-20M EV), according to Dealsuite H1 2025.

EV/EBITDA multiples by sector: how to value your company

The EV/EBITDA multiple is the most widely used ratio in the mid-market for valuing companies. It is calculated by dividing Enterprise Value by EBITDA. The higher the multiple, the higher the relative valuation.

Factors that increase the multiple

Factors that increase the multiple include: recurring revenue (SaaS model or long-term contracts), leading position in niche, autonomous management team not dependent on founder, margins above sector average, and demonstrable growth potential with historical data.

Factors that reduce the multiple

Factors that reduce the multiple include: excessive dependence on owner (key-man risk), customer concentration (one customer represents more than 20% of turnover), structurally declining sector, pending legal or tax contingencies, and lack of implemented management systems (ERP, CRM).

Sector (Spain, mid-market)	EV/EBITDA multiple range	Source
Technology / SaaS	8x − 15x	TTR Data 2024-2025
Manufacturing industry	4x − 7x	Argos Index Q4 2024
Business services	5x − 8x	Dealsuite H1 2025
Health and pharmaceuticals	7x − 12x	TTR Data 2024-2025
Private security	5x − 9x	Capittal Transacciones analysis
Food	5x − 8x	Argos Index Q4 2024

EBITDA limitations: what this metric doesn't tell you

Despite its usefulness, EBITDA has important limitations that every business owner should know before making decisions based exclusively on this metric.

It doesn't reflect investment needs (CAPEX)

A company that needs to constantly reinvest in machinery will have less available cash than its EBITDA suggests. According to a McKinsey & Company analysis (2023), industrial companies with maintenance CAPEX above 30% of EBITDA generate significantly lower free cash flow than their EBITDA suggests, which can reduce their effective valuation by between 15% and 25%.

It doesn't capture working capital variations

If your company grows rapidly and needs to finance more inventory or grant longer payment terms to customers, actual cash will be lower than EBITDA.

It can be manipulated

Accounting decisions such as capitalising expenses that should be current, or classifying recurring expenses as extraordinary, can artificially inflate EBITDA. A good M&A adviser will identify these adjustments during due diligence.

"At Capittal we always recommend analysing EBITDA alongside free cash flow, net debt, cash conversion ratio and maintenance CAPEX. EBITDA only tells part of the story."

— Samuel Navarro, Capittal Transacciones

Adjusted EBITDA: what it is and how to calculate it

Adjusted EBITDA (or normalised) is accounting EBITDA corrected to reflect the company's recurring and sustainable profit generation capacity. It is the figure that is actually used in price negotiations in M&A transactions.

The most common adjustments in the Spanish mid-market are:

Type of adjustment	Example	Effect on EBITDA
Owner's market salary	Owner earns €40K but market would pay €120K	Reduces EBITDA by €80K
Personal expenses in company	Vehicle, travel and partner's insurance	Increases EBITDA
Related party rent	Property owned by partner rented below market	Reduces EBITDA when adjusted to market
Non-recurring expenses	One-off redundancy payment, litigation	Increases EBITDA
Non-recurring income	Extraordinary grant, asset sale	Reduces EBITDA

Frequently asked questions about EBITDA

Is EBITDA the same as profit?

No. Net profit is the final result after all expenses (interest, taxes, depreciation and amortisation). EBITDA excludes these four items to show purely operating profitability. They are complementary metrics: net profit reflects what remains for shareholders, while EBITDA reflects the business's cash generation capacity.

Does negative EBITDA mean the company is doing badly?

Not necessarily. Startups in accelerated growth phase may have negative EBITDA while investing in market capture (e.g. SaaS companies burning cash to acquire users). However, for mature companies with more than 5 years of activity, sustained negative EBITDA for more than 2 financial years is a worrying signal indicating that the business model does not generate operating value.

How is adjusted EBITDA calculated?

Start with accounting EBITDA and eliminate non-recurring or non-representative items: redundancy payments, litigation expenses, owner's market salary (if earning above or below market), related party rents at non-market prices, and personal expenses charged to the company. In Spain, the most common adjustments in SMEs affect the owner's salary and vehicle and personal travel expenses.

Does EBITDA appear in annual accounts?

Not directly. EBITDA is not an official accounting magnitude under the Spanish General Accounting Plan nor under IFRS. It is a magnitude calculated from profit and loss account data. However, many companies report it voluntarily in their management reports, and the CNMV requires its disclosure in certain cases for listed companies.

What EBITDA multiple is paid for a company in Spain?

It depends on sector, size and market timing. According to Dealsuite data for the first half of 2025, the median in the Spanish mid-market (transactions of €1 to €20 million Enterprise Value) stands at 5.4x EBITDA. Technology and health companies can reach 8-15x, while mature sectors such as manufacturing move between 4x and 7x.

Sources and references

• Argos Index, Epsilon Research. Mid-Market Valuation Multiples, Q4 2024.
• Dealsuite. Mid-Market Monitor Spain, H1 2025.
• Bank of Spain. Central de Balances, annual data 2024.
• TTR Data. M&A Transactions in Spain, annual report 2024-2025.
• McKinsey & Company. Valuation: Measuring and Managing the Value of Companies, 7th ed.
• CNMV. Guide on Alternative Performance Measures (APMs), updated 2024.

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Last updated: March 2026