Quick answer
EBITDA stands for earnings before interest, tax, depreciation and amortisation. It's a business's profit with those four items added back, giving a rough measure of the cash the operations generate before financing, tax and the cost of wearing out assets. Lenders use it to compare a business's earnings with its debts and repayments, though it isn't the same as cash in the bank.
Key points
- EBITDA = net profit + interest + tax + depreciation + amortisation
- Lenders compare it with total debt and with annual repayments to judge capacity
- It ignores tax bills, equipment replacement and cash tied up in stock and debtors
- It's a non-IFRS measure, so it doesn't appear as a line in statutory accounts
Five letters, one idea: strip out the costs that depend on how a business is financed, taxed and accounted for, and see what the day-to-day trading earns. The acronym spells out exactly what’s excluded: interest, tax, depreciation and amortisation.
The formula
| Start with | Net profit after tax |
|---|---|
| Add back | Income tax expense |
| Add back | Interest paid on loans and leases |
| Add back | Depreciation on equipment, vehicles and fit-outs |
| Add back | Amortisation of intangibles such as goodwill or software |
| Equals | EBITDA |
Depreciation and amortisation are accounting entries that spread the cost of an asset over its life. No cash leaves the account when they’re recorded, which is why they’re added back. Interest and tax are added back so businesses with different debt levels and structures can be compared on the same footing.
Why lenders care about it
Business lenders use EBITDA in two main ways. First, they set total debt against it, a measure of leverage: a business owing three times its annual EBITDA is carrying far more than one owing a single year’s worth. Second, they compare it with yearly repayments to arrive at the debt service coverage ratio. If EBITDA only just covers repayments, there’s no buffer for a bad quarter.
Lenders often adjust the figure before using it. One-off costs, such as a legal settlement or a relocation, may be treated as add-backs; owner drawings above a market wage might be too. Expect a credit assessor to question every adjustment, so have the evidence ready.
To see how your own figures stack up against repayments, try the DSCR calculator, or ask us what your EBITDA could support.
A worked example
A Perth sheet-metal fabricator’s most recent profit and loss shows:
| Item | Amount |
|---|---|
| Net profit after tax | $196k |
| Income tax | $84k |
| Interest on equipment loans | $47k |
| Depreciation on machinery and utes | $128k |
| Amortisation of software | $9k |
| EBITDA | $464k |
The business owes $610k across equipment loans and an overdraft, and is seeking a further $350k for a laser cutter. Total debt would rise to $960k, a little over twice EBITDA. Annual repayments on all of it would come to about $295k, which EBITDA covers roughly 1.6 times.
On those numbers many lenders would see room to lend. They’d still check the timing of tax bills, how much of the $128k depreciation reflects machines that will need replacing soon, and whether the business is waiting on large debtor balances.
What EBITDA doesn’t tell you
- Tax still has to be paid. A company’s income tax and any PAYG instalments come out of real cash.
- Machines wear out. In an asset-heavy business, depreciation is a fair estimate of what it will cost to replace equipment, and ignoring it flatters the result.
- Working capital ties up cash. Growing debtors or stock can drain the bank account while EBITDA looks fine.
That’s partly why the corporate regulator, ASIC, treats EBITDA as a non-IFRS measure. Its regulatory guide RG 230 sets out how companies should present figures like this alongside statutory profit, so readers aren’t misled.
Know your EBITDA and want to put it to work?
If your accountant has already calculated EBITDA, you’re ahead of most applicants. Share the figure, your current debts and what you want to fund. Sending it is a sixty-second job, and nobody runs your credit while we read it. No lender list receives your details; one of our team reviews them and gives you a call. Use the latest full-year figures so the options we put forward actually fit your numbers.
Frequently asked questions
Is EBITDA the same as cash flow?
No. EBITDA ignores tax you still have to pay, money spent replacing equipment, loan principal repayments and changes in stock and debtors. A business with healthy EBITDA can still run short of cash, for example while it's waiting on large invoices or building stock for a busy season.
How do I calculate EBITDA from my profit and loss?
Start with net profit before tax, then add back interest expense, depreciation and amortisation. If you start from net profit after tax, add income tax back as well. Your accountant can produce the figure from your financial statements in a few minutes.
What is a good EBITDA for a small business?
There's no single figure. What matters to a lender is EBITDA relative to the debt and repayments the business carries. The same EBITDA can easily support a loan for one business and be stretched for another that already has heavy commitments.
What's the difference between EBIT and EBITDA?
EBIT stops before adding back depreciation and amortisation, so it's lower and accounts for the cost of wearing out assets. Asset-heavy businesses such as transport or manufacturing often look much stronger on EBITDA than on EBIT.
Do sole traders have an EBITDA?
You can calculate one, but it needs care. A sole trader's profit includes the owner's own pay, so lenders usually deduct a reasonable living allowance or owner's wage before treating the remainder as available for repayments.