EBITDA stands for earnings before interest, taxes, depreciation and amortisation. It measures a company's core operating profit before financing and accounting effects come out of it, which lets you compare how profitable two very different companies are on a like-for-like basis.
It also ignores real costs, the debt repayments and the money spent keeping equipment working, so it belongs alongside other measures rather than on its own. General information only, not financial advice.
EBITDA is one of the first things worth learning if you want to know whether the companies in your portfolio are making money or only look like they are.
what is ebitda?
EBITDA stands for earnings before interest, taxes, depreciation, and amortisation. That is a mouthful. In plain language it measures how much money a company earns from its core operations before the tax office, the bank and the accounting rules about how fast equipment loses value each take a cut.
Think of it as the raw profit engine of a business. It answers one question. Strip away the financial engineering, and how much money does this thing make?
Investors care because it lets you compare companies fairly, even when they sit in different countries, have different tax situations, or carry very different amounts of debt. Investopedia on EBITDA has the full technical breakdown with worked examples if you want it.
two coffee shops, one number
Two friends both open coffee shops in Melbourne.
funded with debt
alex
Takes out a large bank loan to renovate. Pays interest every month.
funded with savings
sam
Uses family savings. No debt, so no interest payments at all.
Both shops take $500,000 a year in sales and spend $300,000 on beans, rent and staff. Their EBITDA is identical.
Alex's net profit looks poor, because a chunk goes to loan repayments. Sam's net profit looks strong, because there is no debt. Read only the net profit line and you would think Sam runs the better business. EBITDA says they are equally strong operationally. Alex chose a different way to fund the fit-out.
That is why investors use it: it separates how the business performs from how it is financed.
why investors use it
Three reasons this metric shows up in almost every investment conversation.
1. comparing companies on the same footing
Two companies in the same industry can have completely different tax positions, debt levels and asset structures. EBITDA strips those differences away and shows which one is better at turning revenue into operating profit. It works best inside one industry, because typical margins differ from one industry to the next. The ASX publishes the results and annual reports of every company listed on it. Where a company reports EBITDA, that is where to find it.
2. spotting whether growth is real
A company might report record revenue. If costs are growing faster than sales, EBITDA tells you. Rising revenue with flat or shrinking EBITDA is a red flag: the company is growing, but not profitably.
the red flag
when revenue grows and ebitda does not
Revenue is the headline, and EBITDA shows whether the headline turned into anything. Watch for the two moving in opposite directions for more than a couple of reporting periods.
3. valuing a company for acquisition
When one company buys another, the price almost always comes off an EBITDA multiple. A business with $2 million in EBITDA trading at 10x is valued at $20 million. You will see this constantly in startup and private equity news.
how to work it out, two ways
There are two common versions of the EBITDA equation, and they give you the same answer.
method 1: EBITDA = revenue - operating expenses (excluding interest, taxes, depreciation and amortisation)
method 2: EBITDA = net income + interest + taxes + depreciation + amortisation
Method 2 is the more common way to get EBITDA, because net income is usually the number sitting right there in the financial statements. You add back the things that were taken out.
quick glossary
| what it means | |
|---|---|
| depreciation | Spreading the cost of physical assets, machinery, vehicles, buildings, over their useful life as they wear out. |
| amortisation | The same idea for intangible assets like patents, software licences or brand trademarks. |
| interest | What a company pays on any borrowed money. |
| taxes | What the government takes, which varies a great deal by country and by structure. |
For a deeper look at how these pieces fit together, ASIC Moneysmart on choosing shares to buy lists the reports a listed company publishes and the key numbers to watch.
the margin, an efficiency test
EBITDA margin = EBITDA / total revenue x 100
This tells you what share of every dollar earned becomes operating profit. A company with $10 million in revenue and $3 million in EBITDA has a 30% margin.
Higher margins generally mean a more efficient business, and context decides what higher means. Listed US software companies averaged about 36% in January 2026, because once the product is built each new customer costs almost nothing to serve. A restaurant might run at 15% and be doing well, because the industry is cost-heavy.
So compare margins inside the same sector. A 20% margin in retail is excellent, and a 20% margin in software is below average.
Two words worth having straight: operating profitWhat the business makes from the work it does, before financing and tax are counted. and adjusted EBITDAA company's own version of the number, with items it considers one-off added back. Always read what was adjusted..
what ebitda does not tell you
EBITDA has real limits, and ignoring them is how people get burned.
- It hides debt problems. A company can post a handsome EBITDA and still be drowning in loan repayments. If most of that operating profit goes straight to the bank, there is nothing left for shareholders or growth.
- It ignores the cost of staying competitive. Depreciation is a real cost. If a manufacturer has to replace $5 million of equipment every few years, pretending that cost does not exist gives you a dangerously rosy picture.
- It is not cash flow. EBITDA gets used as shorthand for cash flow and the two are different. A company can have strong EBITDA and still run out of cash if customers pay late or inventory is piling up.
- It can be massaged. Because EBITDA is not defined by official accounting standards, neither GAAP nor IFRS, companies sometimes calculate it in whichever way flatters them. Always check what is in and what is out.
Use EBITDA alongside other measures. Pair it with the P/E ratio for a fuller picture.
ebitda against the other metrics
| what it measures | includes debt and tax? | |
|---|---|---|
| EBITDA | Operating profitability | No |
| net income | Bottom-line profit after everything | Yes |
| free cash flow | Actual cash available after all spending | Yes |
| P/E ratio | Price relative to earnings per share | Yes |
For how P/E ratios work alongside EBITDA, there is a dedicated guide. If you are earlier in the journey and want the building blocks first, start with the guide to ETFs.
how this connects to impact investing
the combination that lasts
strong numbers and real impact, together
A company with strong EBITDA and real positive impact is earning money from its operations while doing work worth doing. EBITDA does not show how much debt a company carries, so read it beside the balance sheet.
At inaam we read financial indicators like EBITDA alongside impact data. We want to know how a company makes its money as well as whether it makes any, and what the broader social and environmental footprint looks like. Every company clears three checks, financial robustness, purposeful impact and leadership calibre, written out on how it works, and the five themes it spreads across are set out on investment areas.
The Responsible Investment Association Australasia (RIAA) tracks which Australian funds meet genuine responsible investment standards rather than marketing ones. Their benchmark report is worth reading if you want to see how different managers stack up.
what to do with this
Knowing what EBITDA is and what it leaves out already puts you ahead of most people who are investing. What to remember:
- Use it to compare companies in the same industry, not across wildly different sectors.
- Check the margin to see how efficient the business is.
- Do not use it alone. Pair it with cash flow, debt levels and the P/E ratio.
- Ask what is included. Different companies define adjusted EBITDA differently.
- Look at the trend. Is EBITDA growing year on year, or shrinking?
