EBITDA (earnings before interest, taxes, depreciation and amortisation)

Published Thursday 6 August 2026

Table of contents

• EBITDA (definition)
• Why EBITDA matters
• When to use EBITDA
• How to calculate EBITDA
• Example EBITDA calculation
• EBITDA margin
• EBITDA vs net profit
• EBITDA vs EBIT, EBT and adjusted EBITDA
• What EBITDA doesn’t tell you
• Track EBITDA with Xero
• FAQs on EBITDA
• Related terms
• Learn more about EBITDA

Key takeaways

• EBITDA (earnings before interest, taxes, depreciation and amortisation) shows your core operating profitability by adding interest, taxes, depreciation and amortisation back to net profit.
• It lets you compare businesses with different financing and tax positions, which is why lenders and investors often ask for it when you apply for a loan, seek investment or prepare to sell.
• EBITDA margin (EBITDA divided by revenue) shows how much operating profit you keep from each dollar of sales, though a healthy margin varies by industry.
• EBITDA leaves out debt, capital spending and working capital, so read it alongside net profit, cash flow and your balance sheet.

EBITDA (definition)

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It measures your business’s operating profitability by excluding financing costs, tax obligations and the accounting treatment of ageing assets.

Here’s what each part of the acronym means:

• Earnings: the net profit your business generates from its operations
• Interest: the cost of borrowing money through loans or credit
• Taxes: the income tax owed to government authorities
• Depreciation: the gradual expense of physical assets like equipment and vehicles
• Amortisation: the gradual expense of intangible assets like patents and trademarks

Why EBITDA matters

Now that you know what EBITDA measures, here’s why it’s useful for your business. EBITDA shows your core operating profitability without financing and accounting decisions getting in the way.

This metric helps you and the people who assess your business:

• Owners can see how well the business generates profit from day-to-day operations
• Lenders can compare performance across businesses with different financing structures
• Investors can gauge growth potential when weighing up an opportunity

Because it strips out interest, tax and non-cash charges, EBITDA gives a comparable view of operational health across very different businesses.

When to use EBITDA

Knowing when to reach for EBITDA helps you apply it well. It’s most relevant when you need to show your business’s earning potential to an external party.

Consider tracking EBITDA when you’re:

• Applying for a business loan: lenders use EBITDA to judge your ability to service debt
• Seeking investors: investors compare EBITDA across businesses to evaluate opportunities
• Preparing for a sale: business valuations often use EBITDA multiples to set a price
• Benchmarking performance: compare your operations against competitors with different capital structures

For everyday decisions like tax planning or managing cash flow, net profit or a cash flow statement is usually more useful. EBITDA works best as a comparison and valuation tool rather than a day-to-day measure.

How to calculate EBITDA

Calculating EBITDA is straightforward once you have your income statement figures. There are two common ways to work it out.

The first starts from net profit and adds back the costs EBITDA leaves out:

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

You’ll find these figures on your income statement. The second method starts from operating profit:

Operating profit + depreciation + amortisation = EBITDA

This second method works well when your accounting software shows operating profit separately from net profit.

Example EBITDA calculation

Seeing the formula in action makes it easier to apply to your own business. Here’s how a small business might calculate EBITDA from its income statement.

• Net profit: HK$300,000
• Interest: HK$50,000
• Taxes: HK$100,000
• Depreciation: HK$80,000
• Amortisation: HK$20,000

Adding the figures together gives the result:

HK$300,000 + HK$50,000 + HK$100,000 + HK$80,000 + HK$20,000 = HK$550,000

This business has an EBITDA of HK$550,000, which represents its operating earnings before financing and accounting costs.

EBITDA margin

EBITDA on its own is a dollar figure, so it’s hard to compare across businesses of different sizes. EBITDA margin solves that by expressing EBITDA as a percentage of revenue.

The formula is:

EBITDA ÷ revenue × 100 = EBITDA margin

Using the example above, a business with EBITDA of HK$550,000 and revenue of HK$2,000,000 has an EBITDA margin of 27.5%. A higher margin means the business keeps more operating profit from each dollar of sales. What counts as a good margin varies widely by industry, so compare yours against businesses like your own rather than against a single benchmark.

EBITDA vs net profit

Understanding the difference between EBITDA and net profit helps you pick the right measure. Both look at profitability, but they include different costs.

• Net profit subtracts all expenses from revenue, including interest, taxes, depreciation and amortisation
• EBITDA leaves those items out to show only your operating earnings

Because EBITDA excludes more costs, it’s usually a larger number than net profit. Use net profit to see your bottom line after every obligation, and use EBITDA to assess core operational performance.

EBITDA vs EBIT, EBT and adjusted EBITDA

EBITDA belongs to a family of earnings measures, and the differences come down to which costs each one adds back. Knowing them helps you read financial statements and valuation reports with more confidence.

• EBIT (earnings before interest and taxes): adds back interest and taxes but not depreciation and amortisation, so it still reflects the cost of ageing assets
• EBT (earnings before taxes): profit after interest but before tax, which shows performance regardless of your tax position
• Adjusted EBITDA: EBITDA with one-off or non-operating items removed, such as a one-time legal cost or an owner’s personal expense, to show normalised earnings

What EBITDA doesn’t tell you

EBITDA is useful, but it doesn’t give the complete financial picture. It leaves out several factors that matter to the health of your business.

• Hides debt levels: EBITDA doesn’t show how much a business owes or its ability to repay loans
• Ignores capital spending: equipment purchases and major investments aren’t reflected in the figure
• Lacks standardisation: because it isn’t defined under accounting standards, businesses can calculate it differently, which makes direct comparisons harder

For a fuller view of financial health, read EBITDA alongside net profit, cash flow and your debt levels.

Track EBITDA with Xero

Once you understand EBITDA, tracking it regularly helps you communicate your business’s value to lenders and investors with confidence.

Xero’s online accounting software pulls together the income statement figures you need to calculate EBITDA. With real-time reporting and clear financial dashboards, you can keep an eye on profitability without the manual work, so get one month free and see how straightforward financial management can be.

FAQs on EBITDA

Here are answers to common questions about EBITDA and how it applies to your business.

What does your EBITDA tell you?

EBITDA tells you how much profit your business generates from core operations before financing costs, taxes and non-cash accounting charges. A higher EBITDA generally points to stronger operational performance.

What is a good EBITDA margin for a small business?

A good EBITDA margin is one that covers your debt payments and leaves room to reinvest, and it varies by industry. Compare your margin against businesses similar to yours rather than a single across-the-board figure.

Does EBITDA include owner salary?

Yes, EBITDA usually includes owner salary as an operating expense. When valuing a small business for sale, buyers may use seller’s discretionary earnings (SDE) instead, which adds the owner’s salary back in.

When should I use EBITDA instead of net profit?

Use EBITDA when comparing businesses with different capital structures or presenting your business to investors and lenders. Use net profit for tax planning, cash flow decisions and understanding your actual bottom line after all costs.

Related terms

• Gross profit
• Profit margin
• Profitability
• Margin vs markup

Learn more about EBITDA

• How to measure profitability
• What is profit margin
• Net operating profit after tax
• How to increase profits