EBITDA
Learn what EBITDA means, how to calculate it, what EBITDA margin shows, and how it's used to value a business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- EBITDA stands for earnings before interest, taxation, depreciation and amortisation, and it measures how profitable your core operations are.
- You calculate it by taking net profit and adding back interest, taxation, depreciation and amortisation.
- Owners, investors, lenders and potential buyers use EBITDA to compare performance and assess the value of a business.
- Its main limitation is that it ignores real costs like debt and capital spending, and it isn’t a standardised metric.
What is EBITDA?
EBITDA is a measure of profitability that excludes the costs of financing, taxation, and asset ageing. It stands for earnings before interest, taxation, depreciation and amortisation.
By setting those costs aside, EBITDA shows how much your business earns from its day-to-day operations. Here’s what each part means:
- Earnings: your operating profit before the costs below are added back
- Interest: the cost of any loans or other financing
- Taxation: the company tax paid on your profit
- Depreciation: the falling value of physical assets over time
- Amortisation: the falling value of intangible assets over time
You’ll find the figures behind EBITDA in the reports your online accounting software already produces, so there’s no need to build them from scratch.
Why EBITDA matters and who uses it
EBITDA matters because it shows how profitable your core operations are, before financing and accounting decisions cloud the picture. Stripping out interest, taxation, depreciation and amortisation makes it easier to judge operational efficiency and compare one business with another.
That’s why several groups rely on it:
- Business owners: track operating performance and find ways to improve efficiency
- Investors: compare profitability across companies before committing funds
- Lenders: check whether a business earns enough to cover repayments
- Potential buyers: value a business on its core earnings
How to calculate EBITDA
You calculate EBITDA by starting with net profit and adding back interest, taxation, depreciation and amortisation. The formula is:
Net profit + Interest + Taxation + Depreciation + Amortisation = EBITDA
Each figure comes straight from your accounts:
- Net profit: revenue minus all expenses and taxes, taken from your profit and loss statement
- Interest: financing costs on loans and other debt
- Taxation: company income tax
- Depreciation: the reduced value of your physical assets
- Amortisation: the reduced value of your intangible assets
You can pull net profit from your profit and loss statement. There’s also a shorter route: because operating profit already excludes interest and taxation, you only add back depreciation and amortisation to reach EBITDA.
Example EBITDA calculation
A worked example shows how the add-backs come together. Say a business reports a net profit of $300,000 for the year and records the following costs:
- Net profit: $300,000
- Interest: $50,000
- Taxation: $100,000
- Depreciation: $80,000
- Amortisation: $20,000
Adding these figures together gives an EBITDA of $550,000.
What is EBITDA margin?
EBITDA margin is EBITDA divided by total revenue, shown as a percentage. It tells you how much of every dollar of revenue is left as operating profit before interest, taxation, depreciation and amortisation.
Because it’s expressed as a percentage, EBITDA margin lets you compare profitability across businesses of different sizes. What counts as a healthy margin varies by industry, so it’s most useful to compare against similar businesses or your own past results.
How EBITDA is used to value and assess a business
Investors and lenders often use EBITDA as a shortcut to judge what a business is worth and whether it can handle debt. Two measures do most of this work.
The EV/EBITDA multiple compares a company’s enterprise value to its EBITDA. Buyers and investors use it to value a business and compare it with others in the same industry, without financing and tax differences getting in the way.
Debt-to-EBITDA compares total debt to EBITDA. Lenders use it to gauge how easily a business could repay what it owes from its operating earnings, and a lower ratio generally looks more favourable.
EBITDA vs net profit
EBITDA and net profit both measure profitability, but they answer different questions. One looks at operations alone, the other at the full picture.
Net profit is what’s left after every expense, including interest, taxation, depreciation and amortisation. EBITDA adds those costs back to show how the core operations perform on their own, so net profit reflects your bottom line while EBITDA focuses on operating performance.
What EBITDA doesn’t tell you
EBITDA has clear limits, because the costs it leaves out are still real. Keep these gaps in mind when you use it:
- Ignores debt: interest on loans still has to be paid
- Ignores capital spending: money invested in equipment and assets doesn’t show up
- Isn’t standardised: there’s no single official rule for how it’s calculated
Because it isn’t a standardised metric, some businesses report adjusted EBITDA, which strips out one-off or non-cash items on top of the usual add-backs. Two businesses may also treat capital expenditure and other items differently, so compare these figures carefully.
Track your profitability with Xero
Working out EBITDA is far easier when your numbers are up to date and sitting in one place. Xero brings your income and expenses together so you can see how your business is tracking, and you can get one month free when you choose a plan.
FAQs on EBITDA
Here are answers to some frequently asked questions about EBITDA.
Is EBITDA the same as net profit?
No. Net profit is your profit after interest, taxation, depreciation and amortisation, while EBITDA adds those costs back to focus on operating performance.
What is a good EBITDA margin?
There’s no universal benchmark, because a healthy EBITDA margin depends on your industry. Compare your margin with similar businesses or your own past results.
Why do investors and lenders use EBITDA?
It shows core operating earnings without financing and tax differences, which makes businesses easier to compare. Lenders also use it to judge whether you can cover debt repayments.
What is adjusted EBITDA?
Adjusted EBITDA removes one-off or non-cash items on top of the standard add-backs. It aims to give a clearer view of ongoing performance.
How is EBITDA different from operating profit?
Operating profit excludes interest and taxation but still subtracts depreciation and amortisation. EBITDA adds those two costs back, so it’s usually higher than operating profit.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.