EBITDA (earnings before interest, taxes, depreciation and amortisation)
Learn what EBITDA is, how to calculate it, what a good EBITDA margin is and how it's used in business valuation.
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- EBITDA stands for earnings before interest, taxes, depreciation and amortisation, and measures operating profitability by stripping out financing costs, tax and non-cash expenses.
- You can calculate EBITDA by adding interest, taxes, depreciation and amortisation back to net profit, or by adding depreciation and amortisation to operating profit.
- EBITDA margin (EBITDA divided by revenue) helps you compare profitability across businesses and industries, with margins above 10% often considered healthy.
- EBITDA is useful for valuation and benchmarking but doesn't show debt levels, capital spending or cash flow, so combine it with other metrics for a full picture.
What is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It's a measure of operating profitability that strips out financing costs, tax obligations and non-cash charges for depreciation and amortisation, according to Corporate Finance Institute.
Each component of EBITDA represents something specific:
- Earnings: your net profit after all expenses
- Interest: the cost of borrowing money
- Taxes: income taxes paid to the government
- Depreciation: the gradual reduction in value of physical assets like equipment or vehicles
- Amortisation: the gradual reduction in value of intangible assets like patents or software
By excluding these items, EBITDA lets you focus on how well your core business operations generate profit.
How to calculate EBITDA
There are two standard formulas for calculating EBITDA, and both give you the same result. You'll find the figures you need on your income statement.
The first formula starts with net profit:
- Net profit + interest + taxes + depreciation + amortisation = EBITDA
The second formula starts with operating profit:
- Operating profit + depreciation + amortisation = EBITDA
Both approaches are widely used and produce the same figure, as outlined by Corporate Finance Institute.
Example EBITDA calculation
Here's a worked example using the net profit formula. Assume your business has the following figures for the year:
- Net profit: R300,000
- Interest: R50,000
- Taxes: R100,000
- Depreciation: R80,000
- Amortisation: R20,000
Adding these together: R300,000 + R50,000 + R100,000 + R80,000 + R20,000 = R550,000. Your EBITDA is R550,000.
EBITDA margin and what counts as good
EBITDA margin shows what percentage of your revenue remains as EBITDA. To calculate it, divide your EBITDA by your total revenue and multiply by 100. This gives you a useful way to compare profitability across businesses of different sizes, similar to other profit margin calculations.
A widely cited rule of thumb, according to Wall Street Prep, is that an EBITDA margin above 10% is often seen as healthy, while a margin above 20% is considered strong. That said, what counts as good varies significantly by industry.
For reference, NYU Stern's Damodaran dataset (January 2026) puts the average EBITDA margin for US listed companies (excluding financials) at about 17%. These are US listed-company averages and do not represent South African small-business norms.
Why EBITDA matters
EBITDA helps you assess how well your core business operations perform, separate from how you've financed the business or how you handle tax. This makes it easier to compare your performance against competitors, even if they have different debt levels or capital structures.
Lenders and investors often look at EBITDA when evaluating a business. It shows earning potential before the effects of financing decisions and accounting treatments, giving a clearer view of operational health.
In South Africa, profit margins can be tight. In 2024, the overall after-tax profit margin across South African businesses was just 1.3%, according to Statistics South Africa data published by the Bureau of Market Research. Understanding your EBITDA can help you identify where to focus improvements before interest, tax and non-cash costs come into play.
When to use EBITDA
EBITDA is particularly useful in specific business situations. Consider using it when you're applying for a business loan, seeking investors, preparing for a sale or benchmarking your performance against others in your industry.
When you're looking at business valuations, EBITDA is often a key metric because it allows for comparisons across businesses with different financing and tax situations.
For everyday decisions like tax planning or cash flow management, net profit or cash flow figures may be more useful because they reflect the actual money moving in and out of your business.
EBITDA vs net profit
Net profit is what remains after subtracting all expenses from revenue, including interest, taxes, depreciation and amortisation. It's the bottom line of your income statement.
EBITDA excludes those costs to show operating performance before financing and non-cash charges. While net profit tells you what you actually earned, EBITDA helps you understand the profitability of your core operations.
EBIT vs EBITDA
EBIT stands for earnings before interest and taxes, also known as operating profit. The only difference between EBIT and EBITDA is that EBITDA adds depreciation and amortisation back to EBIT, as explained by Corporate Finance Institute.
If your business has significant depreciation or amortisation costs, the gap between EBIT and EBITDA can be substantial. For asset-light businesses, the two figures may be quite similar.
EBITDA vs gross and operating profit
These profit measures each capture a different stage in your income statement. Understanding the distinctions helps you analyse your business more precisely.
- Gross profit is revenue minus the cost of goods sold, showing what you earn directly from producing or delivering your products and services
- Operating profit (EBIT) is gross profit minus all other operating expenses, but before interest and tax
- EBITDA takes operating profit and adds back depreciation and amortisation
Each metric serves a purpose, with EBITDA providing the broadest view of operating cash generation by excluding non-cash charges.
Adjusted EBITDA
Adjusted EBITDA takes the standard EBITDA figure and makes further adjustments to strip out one-off, irregular or non-recurring items. The goal is to normalise earnings so they better reflect ongoing business performance, according to Corporate Finance Institute.
Common adjustments include removing restructuring costs, legal settlements or gains from selling assets. Because there's no standard method for calculating adjusted EBITDA, figures can differ between companies. Always check what adjustments have been made when comparing adjusted EBITDA across businesses.
EBITDA in business valuation
Buyers and investors often value businesses using an EV/EBITDA multiple (enterprise value divided by EBITDA). This ratio helps compare businesses across different industries and capital structures.
When calculating EBITDA for valuation purposes, owner salary is an operating expense that's included in the calculation (not added back). This differs from seller's discretionary earnings (SDE), which adds the owner's salary back to give a fuller picture of cash available to a new owner. SDE is often used for small-business valuations, as noted by Wall Street Prep.
What EBITDA doesn't tell you
EBITDA has limitations you should keep in mind. It hides how much debt your business carries, since interest is excluded. It also ignores capital spending, so a business with heavy equipment needs may look more profitable than it really is.
EBITDA is a non-GAAP measure, which means it's not standardised under IFRS or other accounting frameworks. Companies can calculate it differently, making direct comparisons tricky.
For a full picture of your financial health, combine EBITDA with net profit and cash flow analysis.
Track EBITDA with Xero
Xero's online accounting software pulls together the income statement figures you need to calculate EBITDA. With real-time reporting, you can access up-to-date numbers for net profit, interest, depreciation and amortisation whenever you need them.
Whether you're preparing for a meeting with your bank, benchmarking against industry peers or planning a sale, having accurate financial data at your fingertips makes the process smoother. Get one month free and see how Xero can help you stay on top of your business finances.
FAQs on EBITDA
Here are answers to common questions about EBITDA and how it applies to your business.
What is a good EBITDA margin?
A margin above 10% is often considered healthy, while above 20% is seen as strong. However, what's good depends on your industry, as some sectors naturally have higher or lower margins.
Does EBITDA include owner salary?
Yes, owner salary is an operating expense included in EBITDA. If you're calculating seller's discretionary earnings (SDE) for a small-business sale, you'd add owner salary back.
Is EBITDA the same as operating profit?
Not quite. Operating profit (EBIT) includes depreciation and amortisation as expenses, while EBITDA adds those non-cash costs back to show a higher figure.
What is adjusted EBITDA?
Adjusted EBITDA removes one-off or non-recurring items from standard EBITDA to give a clearer view of ongoing operating performance. There's no standard formula, so always check which adjustments have been made.
When should I use EBITDA instead of net profit?
Use EBITDA when comparing businesses with different debt levels or capital structures, or when valuing a business. For day-to-day decisions about cash flow or tax, net profit is often more practical.
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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.