EBITDA is calculated two ways that reconcile to the same result: net profit plus interest plus tax plus depreciation plus amortisation, or operating profit (EBIT) plus depreciation plus amortisation. It is a profitability measure, not a cash measure, and it is not a line item in the statutory accounts.
The EBITDA formula, both ways
There are two standard routes and they reconcile to the same number. Starting from the bottom of the profit and loss statement:
EBITDA = net profit + interest + taxes + depreciation + amortisation
Starting from operating profit, which already sits above interest and tax:
EBITDA = operating profit (EBIT) + depreciation + amortisation
Every input comes off the P&L, so the quality of the EBITDA figure is entirely the quality of the P&L behind it. EBITDA itself is not a statutory line item. The recognition and measurement rules for the lines you are adding back, particularly depreciation and amortisation, sit in the AASB accounting standards, and ASIC's guidance for directors and preparers on disclosing financial information that sits outside the accounting standards covers how a non-statutory measure like this should be presented alongside the audited numbers.
What each letter stands for
Earnings is the profit the business made in the period. Interest is the cost of how the business is funded, which is a financing decision rather than a trading one. Taxes reflect structure, jurisdiction and prior losses. Depreciation spreads the cost of a physical asset across its useful life, and amortisation does the same for an intangible one, capitalised software being the usual case in a tech business. Adding those four back is meant to leave you closer to the underlying operating performance.
That is also the honest limit of it. The add-backs are exactly the things a founder cannot ignore, because interest gets paid, tax gets paid, and the asset does eventually need replacing. EBITDA answers one narrow question well and says nothing at all about the rest.
| Why EBITDA strips it out | Why it still matters to the business | |
|---|---|---|
| Interest | It reflects how the business is funded, not how it trades, so removing it makes two differently financed businesses comparable. | Interest is paid in cash, on a schedule, whether or not the trading month was good. A debt-funded business has a real fixed obligation EBITDA does not show. |
| Taxes | Tax is a function of structure, jurisdiction and carried-forward losses rather than of operating performance. | The bill still lands, and for an Australian startup the timing of it interacts with R&D incentives and prior-year losses in ways the EBITDA line hides. |
| Depreciation | It is a non-cash accounting allocation of a cost that was already paid in an earlier period. | The asset wears out and gets replaced. Stripping depreciation out permanently treats a recurring capital cost as if it were a one-off. |
| Amortisation | Same logic applied to intangibles, most often capitalised software or acquired intangibles. | In a tech business this is frequently the engineering spend that keeps the product alive. Adding all of it back can flatter the result considerably. |
What EBITDA does not tell you
EBITDA is not cash flow, and the two diverge most in exactly the businesses that quote EBITDA most. It ignores working capital movements entirely, so a company that is collecting slowly can post a respectable EBITDA while the bank balance falls every month. It also ignores capital expenditure, debt repayments and the tax bill. In a venture-backed business consuming cash to fund growth, which is the normal and fundable condition at that stage, the EBITDA line and the cash line are telling you two genuinely different things.
The number that answers the question EBITDA cannot is burn rate, and the runway that falls out of it.
Who owns the EBITDA number in a growing company
Producing the figure is the easy half, and in most companies it already happens. The half that goes missing is someone who can stand behind it. Finance reporting has to link directly to the business rather than stopping at the actuals, so that the numbers carry a commercial meaning for the people reading them and support a recommendation about what to do next.[1] An EBITDA figure handed to a board with no explanation of what moved and why is a number, not an answer.
This is the gap I see most often in a first finance hire. I have seen a capable accountant in the seat where the financial reporting was done correctly, but who was not as strong on the relationship side. What the business actually needed was someone comfortable getting out into the business, talking about what the numbers mean, and working through how a result should change a decision.[2] Both people can calculate EBITDA. Only one of them changes anything.
It is worth being blunt about why this matters at the hiring decision. Finance is not a back-office function, a cost centre or a ticket taker. It is a commercial partner, and in a company where everything comes back to the numbers it is one of the most important seats you fill.[3] If EBITDA is the number your investors watch, the person who owns it needs to be senior enough to be argued with.
If the reporting is arriving late or arriving thin, the fix is usually structural. Here is how a startup finance team should be structured as it scales.
Common questions
What is the EBITDA formula?
Two routes, one answer. Working up from net profit, add back interest, taxes, depreciation and amortisation. The shorter route starts at operating profit (EBIT) and adds back only depreciation and amortisation. Both pull every input from the profit and loss statement, so an EBITDA figure is only as reliable as the P&L it is built on.
Is EBITDA the same as cash flow?
No, and treating it as a proxy is where founders get caught. EBITDA excludes working capital movements, capital expenditure, debt repayments and tax. A business can report positive EBITDA in a month where cash went backwards, particularly when customers are slow to pay. Read EBITDA and the cash position together, never one instead of the other.
Why do investors ask for EBITDA?
It lets them compare trading performance across businesses with different capital structures, tax positions and asset bases, which is useful when benchmarking or valuing. That is a legitimate use. It becomes a problem when a management team starts running the company to the EBITDA line and quietly stops explaining what happens below it.
Who should own EBITDA reporting in a startup?
Whoever is accountable for explaining it, not just producing it. In a small function that is the Head of Finance or financial controller; once a board and investors are involved regularly it belongs with the CFO. The test is not whether the person can calculate the number. It is whether they can sit in front of the board, say what moved it and why, and defend a recommendation about the next quarter.
References
- My view on this: finance reporting should link directly to the business, moving beyond just focusing on actuals to understand what the numbers mean for stakeholders from a commercial perspective, so that recommendations and inferences about future actions can follow.
- From a search Tom Hunter ran: the previous person in the finance role was a capable accountant and the financial reporting was done correctly, but they were not as strong on the relationship side. What the business needed was someone capable and comfortable getting out into the business, talking about what the numbers actually mean and how decisions should change as a result. The first-finance-hire brief this comes from is the specialism described in an interview with Tom Hunter on the Honest Wealth Builders podcast.
- My view on this: finance is not a back-office function, a cost centre or a ticket taker, but a legitimate commercial partner and one of the most important people in a successful business, because everything comes back to the numbers.