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What is EBITDA?

EBITDA, short for “Earnings Before Interest, Taxes, Depreciation and Amortization,” is a key financial metric used to evaluate a company’s profitability and operational efficiency. In simple terms, it shows the amount of earnings a business generates before accounting for financial costs (like interest), tax obligations, and non-cash expenses such as depreciation and amortisation.

EBITDA is particularly useful because it removes elements that may obscure the true performance of a company’s core business operations. For this reason, it’s a favourite among investors, financial analysts, and lenders when evaluating a company’s financial health, especially when comparing businesses across industries.

What does EBITDA measure?

EBITDA reflects the cash earnings a company retains after deducting the direct costs associated with producing goods or delivering services, but before deducting interest, taxes, depreciation, or amortisation. It essentially shows how much cash the business is generating from its operations alone.

Depreciation and amortisation are non-cash accounting entries related to the wear and tear or usage of fixed assets over time. By excluding these along with interest and taxes, EBITDA provides a clearer picture of how well the core business is performing, particularly when comparing companies with varying capital structures or tax obligations.

How is EBITDA and the EBITDA margin calculated?

Calculating EBITDA is relatively straightforward using the following formula:

EBITDA = Operating Profit + Depreciation + Amortisation

Operating profit, sometimes called EBIT (Earnings Before Interest and Taxes), is the result of deducting a company’s operating expenses (like wages, cost of goods sold, rent, etc.) from its revenue. Once you have operating profit, you simply add back depreciation and amortisation expenses to arrive at EBITDA.

To assess EBITDA in proportion to revenue, you can calculate the EBITDA margin using this formula:

EBITDA Margin (%) = (EBITDA / Revenue) x 100

This percentage indicates how much of each dollar earned in revenue is converted into EBITDA.

How to interpret EBITDA and EBITDA margin?

Unlike some financial ratios, there’s no universal rule that says a specific EBITDA margin is inherently good or bad—it greatly depends on the industry. Some industries naturally operate on thin margins, while others enjoy higher operating efficiencies.

That said, EBITDA can still provide extremely valuable insight. For instance, a high EBITDA margin generally indicates a company is managing its operations efficiently and has a good buffer to handle debt, reinvestment, or distributions to shareholders.

Here are some rough benchmarks for EBITDA margins across typical industries:

  • Retail sector: 2–10%
  • Service industry: 5–15%
  • Manufacturing/Industrial sector: 10–25%

These figures are guidelines only. For example, a retail company may be very successful even with a 5% margin, while a manufacturer with anything less than 10% might be underperforming.

EBITDA as a tool for investors

For investors, EBITDA is a crucial metric when evaluating whether to invest in a business. It helps them understand how much actual cash profit a business is generating before accounting for external influences like taxes or debt structure. It also allows for clearer comparison between companies operating in the same sector.

When comparing multiple companies within an industry, EBITDA can act as a leveller, helping investors identify which businesses are more efficient or profitable on a purely operational level. For example, in the Australian construction sector, two companies may have vastly different EBITDA results based on whether they lease or own their equipment. Adjusting for these differences—such as adding lease payments to EBITDA—can help investors make fairer comparisons.

When EBITDA may not be the best metric

Despite its advantages, EBITDA is not the perfect metric for every situation. One of its biggest limitations is that it excludes interest expenses, making it less useful for assessing highly leveraged or heavily indebted companies.

A company with strong EBITDA might still be in financial trouble if it has high interest obligations or struggles with managing working capital. For such businesses, it’s often more accurate to look at cash flow from operations, which reflects the actual movement of money into and out of the business, including payments on debt and collection of receivables.

In Australia, this is especially relevant in industries where extended credit terms and high levels of debt are common, such as construction or mining. In these cases, EBITDA might paint an overly optimistic picture of a company’s financial health.

EBITDA and business loans in Australia

Beyond its usefulness for investors, EBITDA is also a key figure that lenders review when assessing a business for creditworthiness. Banks and non-bank lenders in Australia will typically analyse a company’s EBITDA when deciding whether to approve a loan, and what terms to offer.

A strong EBITDA suggests that a business is generating enough operating income to service its debts, which improves the company’s risk profile. As a result, businesses with healthy EBITDA margins often receive more favourable loan terms—larger loan amounts, lower interest rates, or longer repayment periods.

In some cases, a solid EBITDA can even reduce or eliminate the need for real estate or asset-based security when applying for a loan. However, lenders will usually also assess other financial indicators such as cash flow, credit history, and the strength of the industry.

Getting a business loan in Australia even with low EBITDA

While a strong EBITDA certainly improves a business’s ability to secure credit, it’s not the only deciding factor. Many lenders in Australia—especially online or non-bank lenders—offer business loans based on broader criteria. This may include time in operation, monthly revenue, customer base, or even the personal credit score of the business owner.

Thanks to the growth of the fintech sector in Australia, it’s now easier than ever for businesses to apply for funding online. A typical online loan process might look like this:

  1. Complete a short online application form
  2. Upload or connect your accounting software or bank data
  3. Receive personalised loan offers within hours
  4. Review and accept an offer
  5. Receive funds directly to your business account, often on the same day

These lenders may not require traditional collateral and are often willing to approve loans even when traditional banks won’t. This flexibility makes it a viable funding option for startups, small businesses, or those in fast-growth mode—even if their EBITDA isn’t strong.

However, it’s important to note that loans approved under these conditions may carry higher interest rates or stricter repayment terms to compensate for the increased risk.

In conclusion

EBITDA is a powerful metric that gives insight into a company’s ability to generate operating profits, stripping away financing and accounting choices that can complicate financial statements. It is particularly useful for investors looking to compare companies, and for lenders evaluating a business’s repayment capability.

That said, it should not be used in isolation. Especially in Australia’s dynamic business environment, understanding the full financial picture—including debt, cash flow, and industry-specific risks—is crucial for sound decision-making. Whether you’re an investor, business owner, or lender, EBITDA remains one of the essential tools in evaluating profitability, but it’s only one part of the story.