EBITDA indicates how much profit a business generates from its core operations before the effects of borrowing, tax, and the accounting charges for depreciation and amortisation. It is a useful proxy for operating performance and for comparing businesses with different financing structures, but it is an indicator rather than a complete picture of financial health.
What it shows well is whether the trading operation itself works — whether the business sells at a margin sufficient to cover its operating cost base. Tracked over several periods, it shows whether operational performance is improving independently of changes in debt, tax or asset policy.
What it does not show is equally important. EBITDA ignores the cost of servicing debt, the tax the business actually pays, the capital expenditure needed to keep assets working, and any movement in working capital. A business can report healthy EBITDA and still be unable to meet its loan repayments or fund the equipment replacement it needs.
For that reason it should be read alongside operating cash flow, net profit, the level of borrowing and planned capital expenditure. Lenders commonly look at EBITDA when assessing affordability — often as a starting point for a debt service calculation — but they consider the fuller picture too, and each lender applies its own criteria.
This is general information about a financial measure, not accounting advice. Your accountant can confirm how EBITDA is derived from your own accounts.