Explore the wider topic in our business valuation process guide.
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EBITDA vs net profit: the key difference
Net profit is the result after the expenses recognised in the income statement, including interest and income tax. EBITDA adds interest, income tax, depreciation and amortisation back to net profit, assuming those items were deducted in that starting figure. It leaves many operating costs in place, including normal wages, rent and selling and administration costs.
EBITDA helps compare operations with different financing or depreciation profiles. Net profit shows a result after more of the business's costs. Neither measure is automatically the right answer to every question. For a decision about funding or payments, you also need cash-flow information.
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Compare gross profit, operating profit and EBITDA
| Measure | Simplified calculation | Useful question |
|---|---|---|
| Gross profit | Revenue less cost of sales. | What remains to cover overhead and other costs? |
| Operating profit | Gross profit less operating expenses, with presentation depending on the accounts. | What did the operating activities earn? |
| EBITDA | Net profit plus interest, income tax, depreciation and amortisation. | What are earnings before these specified items? |
| Net profit | Income less all recognised expenses, including interest and income tax. | What is the final accounting result? |
EBIT means earnings before interest and tax. In a simple operating business it may resemble operating profit, but non-operating income, expense classifications and reporting policies can make the figures differ. Read the accounts rather than relying on the label.
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A worked EBITDA and profit example
Suppose a hypothetical business has annual revenue of $1,000,000 and cost of sales of $400,000. Gross profit is $600,000. Other operating costs are $350,000, excluding $50,000 of depreciation and amortisation. With no other income or unusual classifications, EBITDA is $250,000 and operating profit is $200,000.
Interest is $30,000 and income tax expense is $40,000. Net profit is therefore $130,000. Reversing the bridge gives EBITDA of $130,000 + $30,000 + $40,000 + $50,000 = $250,000. These are illustrative NZD amounts, not a tax calculation or a client result.
The example's EBITDA margin is 25% of revenue; its net profit margin is 13%. The difference follows from the costs excluded, not from one measure being more accurate than the other. It is not an industry benchmark.
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What EBITDA includes and excludes
Normal selling, general and administrative costs remain operating costs. The word tax in EBITDA refers to income tax, not every payment with tax in its name. Cash collected for GST, payroll deductions and other tax obligations need their own accounting and cash treatment.
Depreciation and amortisation spread certain asset costs over time. Removing those expenses does not make the underlying assets free. Equipment may need replacement and software may need investment. Adjusted EBITDA goes further by making specified additional adjustments, so it should always come with a reconciliation.
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Why profit and EBITDA are not cash flow
A sale can be recognised before the customer pays. Inventory can use cash before it becomes cost of sales. Buying equipment and repaying loan principal can reduce cash without appearing as operating expenses in the same period. These timing and classification differences explain why a profitable company can struggle to pay bills.
Use cash flow statement analysis to understand historical movements and cash flow forecasting for upcoming commitments. A cash conversion cycle calculation can help identify cash tied up in stock and collections.
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Choose the measure that fits the decision
For pricing and product mix, start with contribution and gross margin. For operating performance, examine the relevant operating measure and the costs behind it. For ownership returns, financing and a sale, understand the full earnings bridge and the cash requirements as well.
When comparing businesses, use consistent periods, accounting treatments and definitions. An EBITDA multiple cannot be applied casually to a different profit measure. Our valuation methods guide explains where earnings measures sit within a broader valuation, and we can help connect the numbers with the decision in front of you.
Common questions
Is EBITDA the same as net profit?
No. EBITDA excludes interest, income tax, depreciation and amortisation that are normally deducted in arriving at net profit. Reconcile the figures to see the difference.
Is EBITDA always higher than profit?
It is usually higher than net profit when the excluded expenses are positive, but unusual income, tax credits or classifications can change the relationship. Check the actual calculation.
Which measure should an owner track?
Track the measures that explain the decision: margins and operating results for trading, net profit for the accounting outcome, and cash flow for funding and payments. A useful review connects them rather than choosing one number alone.
Your next move
Make sense of your performance measures
Bring your management accounts and the decision you need the numbers to support. We can help explain the differences and identify the performance questions worth investigating.
Make sense of your performance measures