What is EBITDA?

Published Monday 22 June 2026

Table of contents

• What is EBITDA?
• EBITDA vs net profit
• Why EBITDA matters for small businesses
• How to calculate EBITDA
• Example EBITDA calculation
• What is EBITDA margin?
• EBITDA vs EBIT
• What EBITDA doesn't tell you
• How EBITDA is used in business valuation

Key takeaways

• EBITDA stands for earnings before interest, taxes, depreciation and amortisation, and it measures your business's core operating performance by stripping out financing, tax and non-cash expenses.
• You can calculate EBITDA using either your net profit or your operating income as a starting point, then adding back the relevant expenses.
• Lenders, investors and buyers often use EBITDA to compare businesses across industries because it removes variables like debt structure and tax strategies.
• EBITDA has limitations; it doesn't account for capital expenditure, debt repayments or working capital changes, so it should be used alongside other financial metrics.

What is EBITDA?

Earnings before interest, taxes, depreciation and amortisation (EBITDA) is a financial metric that shows how much profit your business generates from its day-to-day operations. It strips out costs that aren't directly tied to running the business, giving you a clearer picture of operational performance.

Each component of EBITDA represents a specific category of expense that gets added back to your bottom line:

• Interest: the cost of borrowing, such as loan or overdraft interest payments
• Taxes: income tax obligations, which vary depending on your business structure and location
• Depreciation: the gradual reduction in value of physical assets like vehicles, equipment or machinery over time. Learn more in our guide to depreciation
• Amortisation: the same concept applied to intangible assets, such as patents, trademarks or software licences. See our amortisation glossary entry for details

For small business owners, EBITDA is useful because it lets you assess how well your core operations are performing without the noise of financing decisions, tax strategies or accounting write-offs. It's a way to see whether your business model itself is profitable. You can also explore other profitability ratios to get a fuller picture.

EBITDA vs net profit

EBITDA and net profit both measure profitability, but they tell you different things. Net profit (also called the bottom line) is what's left after every expense has been deducted, including interest, taxes, depreciation and amortisation. EBITDA, on the other hand, excludes those costs to focus purely on operating earnings.

Net profit gives you the complete picture of what your business actually earns after all obligations. It's the figure you'll report to the ATO and use to calculate your tax liability. EBITDA is more useful when you want to compare your operational performance against other businesses, because it removes differences in capital structure, tax rates and asset bases.

If you're reviewing your own business's health month to month, net profit is the more practical metric. If you're preparing to approach a lender, attract an investor or benchmark against competitors in your industry, EBITDA provides a more standardised comparison.

Why EBITDA matters for small businesses

Even if you're not planning to sell your business tomorrow, understanding EBITDA can help you make better financial decisions. Here are the main reasons it's worth tracking:

• Loan applications: lenders often look at EBITDA to assess whether your business generates enough operating income to service debt repayments
• Investor comparisons: potential investors use EBITDA to compare your business against others in the same industry on a like-for-like basis
• Benchmarking: EBITDA margins let you see how your profitability stacks up against industry averages, helping you spot areas for improvement
• Business valuation: if you're thinking about selling, buyers commonly use EBITDA multiples to estimate what your business is worth
• Operational focus: because EBITDA strips out non-operational costs, it helps you concentrate on the areas you can directly control, like revenue growth and cost management

How to calculate EBITDA

There are 2 common formulas for calculating EBITDA. Both give you the same result; the one you use depends on which figures you have to hand.

1. Starting from net profit

EBITDA = net profit + interest + taxes + depreciation + amortisation

This method works well if you already have your profit and loss statement in front of you. You take your bottom-line profit and add back each of the 4 excluded expense categories.

2. Starting from operating income

EBITDA = operating income + depreciation + amortisation

Operating income (also called operating profit) already excludes interest and taxes, so you only need to add back depreciation and amortisation. This is a quicker calculation if your accounting software or reports already show operating income as a separate line item.

Example EBITDA calculation

Here's a worked example using the net profit method. Imagine a small retail business in Melbourne with these annual figures:

• Revenue: $850,000
• Net profit: $95,000
• Interest expenses: $12,000
• Tax: $28,000
• Depreciation: $18,000
• Amortisation: $7,000

EBITDA = $95,000 + $12,000 + $28,000 + $18,000 + $7,000 = $160,000

This means the business generates $160,000 in operating earnings before accounting for how it's financed, taxed or how its assets are depreciating. That $160,000 figure is what a lender or potential buyer would use to evaluate the business's core earning power.

What is EBITDA margin?

EBITDA margin expresses your EBITDA as a percentage of total revenue. It shows how much of every dollar you earn converts into operating profit before interest, taxes, depreciation and amortisation are taken into account.

The formula is straightforward:

EBITDA margin = (EBITDA / revenue) x 100

Using the example above: ($160,000 / $850,000) x 100 = 18.8%

A higher EBITDA margin generally indicates stronger operational efficiency. What counts as a "good" margin varies significantly by industry. Service-based businesses often achieve margins of 20% or higher, while retail and manufacturing businesses typically operate with tighter margins of 5% to 15%. The most useful comparison is against other businesses in your specific sector.

EBITDA vs EBIT

EBIT stands for earnings before interest and taxes. The key difference is that EBIT still includes depreciation and amortisation, while EBITDA strips those out as well.

EBIT is a useful metric when your business has significant physical or intangible assets, because it accounts for the real cost of those assets wearing down over time. If you run a capital-intensive business with expensive equipment, EBIT gives a more conservative view of profitability than EBITDA does.

EBITDA is more commonly used for comparing businesses across different industries or for valuation purposes, because it removes the impact of different depreciation policies and asset bases. If you're a service-based business with minimal physical assets, the difference between EBIT and EBITDA may be small.

What EBITDA doesn't tell you

EBITDA is a helpful metric, but it has real limitations. Relying on it alone can give you an incomplete or overly optimistic view of your business's financial health.

• It ignores debt: a business with heavy borrowing may show a strong EBITDA but still struggle to meet interest and principal repayments
• It excludes capital expenditure: EBITDA doesn't reflect the cost of replacing or upgrading equipment, vehicles or technology that your business depends on
• It's not standardised: because EBITDA isn't defined under Australian Accounting Standards or IFRS, businesses can calculate it differently, making direct comparisons less reliable
• It overlooks working capital: changes in inventory, accounts receivable and accounts payable don't show up in EBITDA, even though they directly affect your cash position
• It can mask cash flow problems: a business can have a healthy EBITDA while still running short on cash if it's locked up in unpaid invoices or excess stock

The best approach is to use EBITDA alongside other metrics like net profit, cash flow and your debt-to-equity ratio. Together, they give you a more complete view of financial performance. Our guide on how to measure profitability covers these metrics in more detail.

How EBITDA is used in business valuation

When it comes to valuing a business, EBITDA is one of the most commonly referenced metrics. Buyers, investors and brokers use it as the foundation for 2 key valuation methods.

EV/EBITDA multiple

Enterprise value (EV) divided by EBITDA gives you a ratio that indicates how many years of operating earnings a buyer is paying for. A business with an EBITDA of $160,000 and an EV/EBITDA multiple of 4x would have an implied enterprise value of $640,000. Multiples vary by industry, growth rate and risk profile; small businesses in Australia typically see multiples between 2x and 6x.

Debt-to-EBITDA ratio

This ratio measures how many years it would take to pay off all debt using EBITDA alone. Lenders use it to assess borrowing capacity. A ratio under 3x is generally considered healthy, while anything above 4x to 5x may signal that the business is carrying too much debt relative to its earnings.

If you're considering selling your business or seeking funding, knowing your EBITDA and understanding how it translates into a valuation gives you a stronger position in negotiations.

Track your profitability with Xero

Understanding metrics like EBITDA starts with having accurate, up-to-date financial data. Xero's reporting tools give you real-time access to your profit and loss statement, balance sheet and cash flow summary, so you can pull the figures you need to calculate EBITDA at any time.

With customisable reports and trend analysis, you can track how your operating profitability changes over time and spot patterns before they become problems. Whether you're preparing for a loan application, benchmarking against your industry or simply keeping a closer eye on your key performance indicators, Xero helps you stay on top of your numbers. Get one month free.

FAQs on EBITDA

Here are answers to some frequently asked questions about EBITDA.

What is a good EBITDA?

There's no single figure that qualifies as "good" because it depends on your industry, business size and growth stage. Comparing your EBITDA margin to industry benchmarks is the most practical way to assess whether your operating profitability is on track.

Is EBITDA the same as profit?

No. EBITDA measures operating earnings before certain expenses are deducted, while net profit accounts for all costs including interest, taxes, depreciation and amortisation. EBITDA will always be equal to or higher than net profit.

How is EBITDA different from cash flow?

EBITDA approximates operating earnings but doesn't account for actual cash movements like loan repayments, capital purchases or changes in working capital. Cash flow tracks the money physically moving in and out of your business, making it a more accurate measure of liquidity.

What does a negative EBITDA mean?

A negative EBITDA means your business's core operations aren't generating enough revenue to cover operating expenses. It's a signal that the business model may need adjusting, costs need reducing, or revenue needs to grow before the business can sustain itself.