EBITDA is earnings before interest, taxes, depreciation and amortization.
It starts from operating profit and adds back four things, each removed for the same reason: they reflect how the business is financed and how its accounts are prepared, rather than how it trades.
Interest depends on how much was borrowed. Taxes depend on structure and jurisdiction. Depreciation and amortization are costs recorded without money moving.
What it is used for
Comparing businesses whose financing differs, and valuing them. Most small-business sale prices are quoted as a multiple of it — see business valuation.
Lenders use it as the starting point for whether debt can be serviced, in debt service coverage.
Where it misleads
It is not cash. The costs added back are real: interest is paid, tax is paid, and equipment written down through depreciation eventually has to be replaced with money.
A business with heavy equipment shows a flattering EBITDA precisely because its largest long-run cost has been removed from the figure.
Adjusted EBITDA
In a sale, the figure is usually restated to remove costs a new owner would not carry: an above-market owner salary, personal expenses run through the business, one-off legal costs.
Each adjustment is a claim that has to be evidenced, and it is the part of a sale most argued over.