What is EBITDA?

Catherine runs a regional bakery and pastry chain in Mons. Four shops and a central production kitchen, around thirty people. She has been at it for fourteen years.

This year she did two things she had been postponing for ages. She refitted the central kitchen with new ovens and a proper cold chain. And she replaced two old delivery vans. The business needed both. Sales had grown for three years running and the old kitchen could no longer keep up.

When the annual accounts arrived, her net profit had dropped sharply. Catherine was confused. Revenue was up. The shops had never been busier. And yet the bottom line was the lowest it had been in five years.

Her accountant explained it. The new kitchen and the vans had to be depreciated. Their cost is spread across the P&L over their useful life as an annual expense. That expense lowers net profit. But it is not cash leaving the business. The cash had already left, the day Catherine paid the supplier. What hits the accounts every year after is an entry, not a payment.

"The number you should look at," the accountant said, "is your EBITDA. It strips out that noise and shows you what your bakery actually produces, before financing decisions and accounting conventions." Catherine had heard the word a hundred times. She had never quite understood what it meant, why it exists, or why her bank, her potential buyers, and every business article keep using it instead of net profit. That changes now.