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EBITDA Explained: The Crucial Financial Metric Every Business Owner Should Monitor

6 min read

Why Is Understanding EBITDA the Most Important Financial Metric for Your Business?

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Are you sure you're tracking the right financial metrics when preparing for tax filing services in 2025? If not, you might be overlooking EBITDA, a crucial metric that can significantly influence your business's valuation and tax strategies.

According to LinkedIn, approximately 50,000 U.S. business owners sell their companies each year, and EBITDA is often a major focal point for potential buyers. A strong EBITDA could mean a higher valuation and smoother negotiations.

In this article, you’ll learn what EBITDA is, how to calculate it, why it matters for your business profitability, and how it affects your 2025 tax filing preparations.

EBITDA vs. EBIT vs. EBT: What’s the difference?

You’ll hear a lot about EBIT, EBT, and EBITDA when talking about financial performance. Here’s the quick breakdown:

  • EBIT (Earnings Before Interest and Taxes) shows operating profit, but still includes non-cash expenses like depreciation and amortization.
  • EBT (Earnings Before Tax) leaves interest expense intact but strips out income tax.
  • EBITDA removes expenses like depreciation and amortization, tax expense, and interest expense, giving you a pure focus on operational performance.

EBITDA offers the clearest lens into profitability by excluding non-operating expenses. It’s no wonder that EBITDA is often used to compare companies across different industries, where tax structures and financing vary widely.

Why is EBITDA important for evaluating business profitability?

You need to know if your business operations are actually profitable, without being distorted by financing choices or non-cash items. That’s where understanding EBITDA becomes crucial.

Here’s why you should use EBITDA to gauge your operational efficiency and profitability:

  • EBITDA provides a cleaner view of operating profit by excluding non-cash expenses like depreciation and amortization.
  • It's often used in valuation because it offers a standardized way to compare companies across industries.
  • A higher EBITDA usually signals better operational performance and a stronger ability to service debt, which directly affects your borrowing power and sale value.

Investors, analysts, and lenders prefer adjusted EBITDA figures when making business decisions, especially during due diligence before a merger or acquisition.

Further Reading: Understand EBITDA's significance in cash flow evaluation

How Do You Calculate EBITDA Accurately for Your Business?

Is your EBITDA helping you lower taxes and boost your business value in 2025?

To calculate EBITDA, you can use two simple methods based on your financial statements:

EBITDA = Net Income + Interest Expense + Tax Expense + Depreciation and Amortization

or

EBITDA = Operating Income + Depreciation and Amortization

This calculation of EBITDA makes it easier to isolate the real earnings from your core business operations, stripping away the distractions of capital expenditures, taxes, and financing decisions.

EBITDA is not a metric recognized by generally accepted accounting principles (GAAP), but it’s a trusted alternate measure of profitability that helps compare companies reliably.

Where can you find the necessary data to calculate EBITDA?

You don’t have to hunt too hard:

  • Net income, interest expense, and tax expense are listed right on your income statement.
  • Depreciation and amortization amounts usually show up on your cash flow statement under "adjustments for non-cash expenses" or in the notes.

Cash flow from operations will also help if you’re cross-checking numbers, especially when tracking changes in working capital. It’s crucial to be precise here, especially if you’re preparing for tax filing in 2025.

EBITDA vs. Operating Cash Flow: Which is more reliable?

If you want the full truth about your company’s performance and cash flow potential, cash flow from operations tells a more complete story than EBITDA.

  • EBITDA excludes working capital changes like unpaid invoices or growing inventory, which do involve actual cash outflows.
  • Operating cash flow shows whether your business can actually generate cash—critical when it’s time to pay bills or file taxes on your IRS Form 1120.

Relying only on EBITDA could hide warning signs. Use EBITDA to measure operational efficiency, but trust operating cash flow when assessing your liquidity for taxes, debt service, and reinvestment.

Further Reading: Learn essential KPIs to track for business growth

How Can You Use EBITDA to Improve Your Business's Financial Health and Tax Strategy in 2025?

How does EBITDA impact your tax planning?

Even though EBITDA is not a metric you submit directly for taxes, it’s a powerful tool for forecasting taxable income and making smart moves before filing.

  • If your company’s EBITDA is strong, you might qualify for strategies like accelerated depreciation under Section 179—lowering your taxable income dramatically.
  • A healthy EBITDA also helps spot your ability to service new loans or lines of credit without risking a cash crunch.
  • Knowing your EBITDA helps you time purchases of assets (like equipment) wisely before year-end.

Basically, understanding EBITDA helps you steer toward tax deductions and smart investments before the IRS closes your books.

How can improving EBITDA increase your business’s valuation if you plan to sell?

If you're thinking about selling, here's the real talk: buyers compare companies based on their EBITDA multiples.

  • A high EBITDA shows your core business operations are solid, independent of tax gimmicks or heavy borrowing.
  • EBITDA can indicate strong overall financial health and help you generate better offers.
  • A higher EBITDA improves your debt-to-EBITDA ratio, another key metric buyers check when evaluating your company’s ability to service debt.

In 2025, capital gains taxes could sting if you’re not careful. A higher, well-documented EBITDA can help you structure a more favorable sale and potentially shield more profits.

Remember: Buyers want operating performance. Not magic tricks. Boost your EBITDA, and you’re boosting your payday.

Further Reading: Track key performance metrics for growth and insight

Final Insights: Why Understanding EBITDA Is Crucial for Your Business’s Financial Success

Tracking EBITDA isn't just for accountants or investors. It’s a smart move for any business owner serious about growth, financial health, and smart tax planning. By understanding EBITDA, you’ll get a clearer view of your operational performance, make sharper business decisions, and position your company for stronger profits or a higher sale price. As 2025 approaches, now’s the time to use EBITDA to sharpen your financial strategy and stay ahead.

How can Taxfyle help?

Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.

At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

Legal Disclaimer

Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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published

May 1, 2025

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Antonio Del Cueto, CPA

Antonio Del Cueto, CPA

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