EBITDA Explained: Cash Profit, Risks, and Real Business Insights

Written by Brendan Mills | Oct 30, 2025

What is EBITDA?

Simply put: Earnings Before Interest, Tax, Depreciation & Amortisation.

It will often be referred to as the 'cash profit' of a business as it reflects the core financial performance of a business, excluding non-cash items and costs related to financing or tax.

Components of EBITDA

Net Income: Profit after all expenses - this includes interest, taxes and non-operational costs.
Interest: Cost of borrowing, excluded from EBITDA to focus on the company's overall efficiencies and operational performance.
Taxes: Corporate taxes, these are also excluded as they vary widely from business to business.
Depreciation: Allocation of the cost of tangible assets over time.
Amortisation: Allocation of the cost of intangible assets over time.

Tangible vs Intangible Assets Defined

Both amortisation and depreciation aim to allocate the cost of an asset over its useful life, however they focus on different kinds of assets:

Depreciation reflects the wear and tear on physical assets over time (think equipment, vehicles)
Amortisation applies to intangible assets (patents, trademarks, software)

How to Calculate Your EBITDA

Why is EBITDA so controversial?

Figures like Warren Buffet and Charlie Munger critique EBITDA, suggesting it can be a rather "convenient" number that omits important costs like depreciation and amortisation, which are legitimate expenses of running a business.

EBIT vs EBITDA: Which Should I Use?

As their names suggest, EBIT (Earnings Before Interest & Tax) includes depreciation and amortisation, whereas EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) excludes these non-cash expenses. EBITDA provides a more complete picture of a business's cash generation, whereas EBIT focuses more on operational efficiency.

EBIT is often preferred for analysing operational profitability because it includes the full spectrum of operating expenses, including asset depreciation. EBIT provides a more complete picture of long-term profitability, particularly for capital-intensive business where asset depreciation plays a significant role in costs.
EBITDA is more focused on cash generation, which can be more useful for short-term liquidity analysis and understanding a company's ability to service its debts. EBITDA is often used for business valuations, especially when comparing companies that have different capital structures or asset depreciation schedules, as it smooths these differences out.

What are Some Real-World Examples of EBITDA?

Let's look at some real-world examples that highlight the difference between EBIT and EBITDA:

1. Manufacturing Company

Revenue: $50 million
COGS & Operating Expenses: $35 million
Depreciation & Amortisation: $5 million
Interest Expense: $2 million
Taxes: $3 million

EBIT Calculation = Revenue - Operating Expense = 50 - 35 = $15 million

EBIT allows for operating income but still includes non-cash items like depreciation and amortisation.

EBITDA calculation = EBIT + Depreciation + Amortisation = 15 + 5 = $20 million

EBITDA removes depreciation and amortisation, giving a clear picture of operational cashflow.

EBIT ($15 million) reflects the operational profit after factoring in depreciation, showing the financial impact of capital investment.
EBITDA ($20 million) has excluded the depreciation, which indicates a stronger cash flow potential, having a knock on effect of making the company appear more profitable but only from an operational standpoint.

In this case, if your business was heavily reliant on machinery, your investors may prefer to look at EBITDA to have a clearer understanding of it's true core operational efficiency without the drag of depreciation.

2. Technology/Software Company

Now consider a business that specialises in software and own a significant amount of intellectual property (IP), such as patents and licenses. As a result of it's business structure, they will have lower tangible assets but far greater amortisation of intangible assets. Here's how it breaks down:

Revenue: $80 million
COGS & Operating Expenses: $50 million
Amortisation: $10 million
Interest Expense: $5 million
Taxes: $4 million

EBIT Calculation = Revenue - COGS - Operating Expenses = 80 - 50 = $30 million

EBITDA Calculation = EBIT + Amortisation = 30 + 10 = $40 million

EBIT ($30 million) includes the amortisation of intangible assets like patents, providing a picture of the business after these expenses.
EBITDA ($40 million) removes the amortisation, providing a more accurate reflection of operation cash flow, which is imperative for a software company with large intangible assets but low physical assets.

Why is EBITDA Used for Valuation?

Despite its critics (looking at you Buffet), EBITDA is still used commonly as a metric for valuing businesses, especially for understanding their ability to generate cash. However keep in mind, EBIT, which excludes depreciation and amortisation, is often preferred as it accounts for a "true" operational profit.

How EBITDA is Commonly Misused

While EBITDA is a valuable financial metric for assessing operational performance and cash flow, it can also be misused and misinterpreted which will lead to an incomplete, or worse off, incorrect picture of a business's true financial health. Here are some of the more common ways we see EBITDA being misused as an outsourced CFO:

1. Ignoring Capital Expenditure (CapEx)

One of the biggest shortcomings of EBITDA is that it doesn't include capital expenditures, which are necessary for expanding and maintaining a business's operational capacity.

Misuse: EBITDA doesn't include the cost of maintaining or replacing physical assets, which will become significant for capital-intensive industries.
Impact: A business might appear to generate strong cash flow if you examined their EBITDA, however if they have a high ongoing investment in CapEx, the actual cash flow available for shareholders or reinvestment might be far lower than anticipated.
Example: A manufacturing company may show impressive EBITDA growth, but if it continues to purchase new equipment as a means to stay competitive, the exclusion of CapEx will distort the true cost of operations.

2. Overlooking Interest and Debt Obligations

EBITDA excludes interest payments, which can cause issues for a business with high debt levels. While important to exclude for operational performance, you are always going to miss a complete view of the business's financial health.

Misuse: Businesses with significant debt might use EBITDA as a key performing metric to downplay and hide the true burden of their interest payments.
Impact: By focusing solely on EBITDA investors can overlook the true profitability of the business, which might have terrible profits after servicing debt costs.
Example: A heavily leverage company might have a healthy looking EBITDA, but once interest expense is added back, profitability could be minimal or even worse - negative.

3. Ignoring Taxes

While EBITDA removes the impact of taxes to give a refined view of operational earnings, taxes are still a legitimate cost of doing business and will need to be factored in for broader analysis.

Misuse: When you ignore taxes it gives the false impression that a business is generating far higher cash flow than it actually is.
Impact: Businesses that operate in high-tax jurisdictions may appear more profitable than they actually are, according to their EBITDA.
Example: A company with a higher corporate tax rate could show solid EBITDA numbers, but after accounting for taxes, the genuine net income will be substantially lower.

4. Underestimating Depreciation and Amortisation Costs

Depreciation and amortisation represent a gradual loss in value of company assets. When you exclude these costs you paint a far rosier picture of profitability, especially for asset-heavy businesses reliant on intangible assets.

Misuse: Businesses using their EBITDA to downplay the true wear and tear cost on physical assets or the consumption of intangible assets.
Impact: If depreciation and amortisation are significant, excluding them will completely misrepresent their long-term sustainability and profitability.
Example: A logistics company with a large fleet of vehicles will appear profitable on an EBITDA basis, however once you begin to factor in the depreciation of the vehicles, it will become clearer that those assets will need constant repair or renewals.

5. Over-Reliance in High-Growth or Distressed Companies

EBITDA is highlighted by high-growth and or distressed companies to hide their negative earnings and potentially poor cash flow.

Misuse: Companies with poor and week net income or cash flow may emphasise their EBITDA, putting their "best" foot forward, to show a vastly more positive financial outlook.
Impact: By using their EBITDA as a shield, they can hide poor profitability, heavy losses or even an unsustainable business model - especially if the company is far from generating enough cash to cover interest, taxes or CapEx.
Example: A start-up may report an impressive EBITDA, however they could still be running significant losses after accounting for other costs and expenses (interest, tax)

6. Using EBITDA as a Proxy for Cash Flow

Often incorrectly interpreted as a measure of cash flow, EBITDA does not account for changes in working capital, CapEx, interest payments and taxes - all key components of actual cash flow.

Misuse: Businesses presenting EBITDA as if it represents the cash available within the business.
Impact: Investors and analysts relying on EBITDA alone have a very high chance of overestimating the liquidity or cash-generating abilities.
Example: A company with lots of stock or slow receivables might have a strong EBITDA, but if its struggling to convert earnings to cash due to issues with their working capital management, actual cash flow will be strained.

7. Misleading Comparisons Between Companies

EBITDA is not a standardised number and metric across industries, which can cause issues when you start to compare businesses as the EBITDA will potentially be misleading.

Misuse: By failing to factor in differences in CapEx intensity, tax structures or working capital needs, when you compare across industry you're more likely to reach incorrect conclusions.
Impact: EBITDA may overstate true profitability in one company company compared to another, exaggerated if one of the businesses is in a particularly capital-intensive industry.
Example: Compare a tech company with very little CapEx to a utility company with heavy infrastructure investments, their EBITDA's are going to be very misleading due to their fundamentally different cost structures.

8. Excluding Necessary Expenses in "Adjusted EBITDA"

It's not unusual for companies to use an 'adjusted EBITDA', where they have removed certain non-recurring or exceptional expenses. While legitimate, it can easily be manipulated to present a far more favourable financial picture.

Misuse: Adjusted EBITDA can be manipulated to exclude essential expenses that the company should genuinely be accounting for - such as legal fees or restructuring costs.
Impact: Stakeholders or investors can be misled into believing the company operating far more profitable and has better prospects than it actually does.
Example: A company might exclude ongoing litigation costs in its adjusted EBITDA, despite the fact these recurring costs should be included for any serious analysis to take place.

How to Improve EBITDA

If you can manage to improve your EBITDA, you'll enhance the overall profitability and financial health of your business. To improve EBITDA consider:

1. Increasing Revenue Streams

The most direct way to improve EBITDA is through increasing your top line revenue.

Expand Product/Service Offerings: Try adding complementary products or services where appropriate to attract more customer spend.
Focus on Upselling and Cross-Selling: Leverage current customer bases to increase their average purchase value.
Explore New Markets: Target new market segments or geographical locations.
Adjust Pricing: Review your current pricing strategy and consider raising prices where possible - as long as it doesn't come at the cost of customer loyalty.

2. Reducing Operating Expenses

Controlling and cutting unnecessary expenses might be an "easy-win" for improving EBITDA as you're directly dealing with operating profit.

Streamline Operational Processes: Through the use of technology and optimising current processes to reduce any inefficiencies in all areas of your business (production, sales, customer service).
Negotiate With Suppliers: Try to secure better terms with your current vendors or look at exploring alternative suppliers for lower-cost services and raw materials. Do you feel stuck with your current supplier? There's nothing wrong with seeking alternatives.
Outsource Non-Core Activities: When in doubt, focus on what your business does best an consider outsourcing any secondary functions to cut costs. If you're enjoying the financial knowledge we're providing, but know finances isn't your strong suit - let us help you focus on what you do best.
Reduce SG&A (Selling, General & Administrative) Expenses: Get a tighter control over non-essential expenditures like supplies, admin costs and travel.

3. Improving Gross Margin

If EBIT can be defined as your gross profit - operating expense, and EBITDA is your EBIT + amortisation & depreciation it's very clear how changing your gross profit will affect your EBITDA. To affect your gross profit look at:

Increasing Production Efficiency: Try (where and when appropriate) investing in automation or more efficient manufacturing techniques to drive down production costs per-unit.
Optimising Supply Chain Management: Improve logistics, negotiate better shipping terms and reduce waste.
Product Differentiation: Try to proposition your product with unique value compared to your competitors, to justify higher prices and reduce price sensitivity. Think Frank Green in the water bottle space.

4. Optimising Your Workforce

Depending on your business structure (most - who works for free?), labour comes at a significant cost, so optimising staff productivity is going to be the key to improve EBITDA.

Cross Train Employees: Multi-skill employees to improve productivity and reduce the need for additional hires. However, this is not saying just offload work to team members who already have a full capacity. Be smart and diligent with who and why you're training up team members.
Performance Incentives: Try looking at introducing bonus schemes specifically tied to performance that are aligned with EBITDA growth.
Evaluate Staffing Levels: Avoid overstaffing while ensuring all critical functions are still covered efficiently and there will be no loss of quality for your clients.

5. Limiting or Reducing Depreciation and Amortisation Costs

I know, I thought EBITDA excluded depreciation and amortisation - and you're right - however high costs in these areas can still indicate potential inefficiencies.

Extend the Life of Assets: Try maintaining your equipment to avoid early depreciation, replacement and repair. This isn't to say chastise your staff for using the equipment, equipment will always suffer wear and tear, but there is a realistic approach one can take.
Lease Instead of Purchase: In some instances, potentially leasing assets might actually be the best option for the business and help reduce associated depreciation costs.

6. Tightening Working Capital Management

If you can manage to improve the efficiency of working capital management (which we cover extensively) you will have an indirect impact on your EBITDA by freeing up cash flow for reinvestment into future growth areas.

Reduce Inventory Levels: Try to avoid excess stock, tying up cash and increasing storage costs for the sake of it helps no one. Do you need help breaking up with your stock?
Improve Receivables Collection: If it's possible (good luck, everyone loves to have the best terms for themself) accelerate your payment terms with clients to short the conversion cycle from project to cash.
Negotiate Better Payment Terms: In the same vain of trying to shorten the length it takes for your debtors to pay you, if you can extend your payment terms with your suppliers to keep cash in your business, do so, to keep cash within your business longer.

7. Investing in Technology and Automation

When implemented correctly and chosen wisely, technology can play a major role in reducing costs and improving operational efficiency.

Implement Automation: Use software and systems for repeatitive tasks such as accounting, customer management or production processes - but do not do anything that sacrifices your quality and relationship with customers.
Upgrade to More Efficient Machinery: Although it may have a steeper upfront cost, it can significantly reduce operating cost and improve margins. First and foremost the machines themselves are an upgrade, but truly examine the difference between constant repair on an older, dying machine versus a perfectly well oiled-machine.

How an Outsourced CFO Can Impact your EBITDA

1. Maximising Cash Generation

An Outsourced CFO can help optimise your EBITDA by focusing on improving your overall core profitability. This is achieved by:

Improving operational efficiency which will reduce operational expenses.
Identifying opportunities for revenue growth - this could be through market expansion, pricing strategies and potentially enhancing the product mix.
Streamlining debt and tax management, with the focus and goal of not having them eat at your cash profits.

2. Managing Depreciation and Amortisation Strategies

While EBITDA excludes amortisation and depreciation, an Outsourced CFO can still help to manage your capital investments to create a balance between growth and long-term control over costs. It should lead to a far greater understanding of how assets will affect your profitability going forward, beyond just cash generation. If the idea of future investments and financial forecasts aren't your cup of tea, help us help you in getting the clarity you deserve as a business owner.

3. Providing Clarity in Financial Reporting

If you're ever unsure, having your own Outsourced CFO will be a great resource for any questions you have regarding the finances of your business. They will help guide you on EBIT vs EBITDA and ensure you won't fall for any of the traps involved in reporting your EBITDA. Additionally, any reporting to stakeholders or potential investors should be made simple and almost carefree to you the owner, as it will be completed with the assistance of your Outsourced CFO. Why not put your best foot forward?

4. Business Valuation and Financing

If you're looking to raise capital or sell your business, an Outsourced CFO will aid and lead the charge through this process - they can ensure your EBITDA is presented in the best light possible showing your ability to generate cash and provide strategy on how the number can still be strengthened.

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