Understanding EBITDA vs net profit through one worked example you can follow from start to finish.
danieel.id Company’s net profit rose from $536 thousand to $560 thousand. Its EBITDA grew by about 5% as well. But look at the very last line of the report: earnings per share (EPS) actually fell, from $1.81 to $1.77. Wait, how can everything go up while each share’s slice goes down?
That is exactly why it pays to understand EBITDA vs net profit, and how to read both alongside the other numbers in a financial report. In short, EBITDA (earnings before interest, taxes, depreciation, and amortization) measures operating results before interest, taxes, depreciation, and amortization are taken into account. Net profit, or net income, is the bottom-line profit after all of those costs are included. EBITDA answers “how strong is the operating engine?”, while net profit answers “how much is left for the owners?”
Think of a company as a ride-hailing motorbike driver (an ojek online, as we call it in Indonesia). A day’s earnings minus fuel, phone credit, and lunch is roughly like EBITDA: a picture of how productive the driver was. But there is still interest on the motorbike loan to pay, money to set aside for new tires and major servicing as the bike wears out, and taxes to settle. Whatever remains after all that is closer to net profit. Working hard doesn’t guarantee much is left if the loan is heavy (and tires, sadly, don’t care whether we had a good day or a bad one).
So we don’t stop at theory, let’s break down EBITDA vs net profit in the seven points below, using the same example throughout: the income statement of the imaginary company I used in the article on the types of financial statements. We’ll start with the report itself.
A Sample Income Statement from danieel.id Company
The 2019 and 2018 income statement of danieel.id Company below is the main material for seeing the difference between EBITDA and net profit; all figures are in thousands of US dollars.
Sales in 2019 reached $6,115, up 12% from $5,476 in 2018. Sounds great, but the cost of goods sold grew even faster, by 15%, from $3,776 to $4,335. As a result, gross profit rose only 5%, from $1,700 to $1,780. Measured as a share of sales, the gross margin actually slipped from about 31.0% to 29.1%. Sales were running, but costs were running faster.
After subtracting total operating expenses of $845, operating profit, or EBIT, came to $935 (2018: $893). The company then recorded other income of $11 and interest expense of $199, bringing net profit before taxes to $747. After $187 in taxes, net profit after taxes was $560, up about 4% from $536.
To be fair, these figures are fictional and simplified for learning purposes, and they are not investment advice. Reports from companies listed on the Indonesia Stock Exchange usually contain more line items, but the way to read them is the same. The order of the line items is covered in more detail in the article on how to read a company’s income statement.
How to Calculate EBITDA from the Income Statement
EBITDA is easiest to calculate by adding depreciation and amortization back to operating profit (EBIT), because interest and taxes have not yet been deducted at the EBIT line. For danieel.id Company in 2019, the calculation looks like this:
EBITDA = Operating profit + Depreciation & amortization
EBITDA = $935 + $259 = $1,194
We can also “climb” up from net profit. Since other income is not part of EBIT in our example, it has to be taken out so the result stays consistent.
EBITDA = Net profit + Taxes + Interest + Depreciation & amortization − Other income
EBITDA = $560 + $187 + $199 + $259 − $11 = $1,194
For 2018, the calculation is $893 + $243 = $1,136, so EBITDA grew by about 5%. As a rough picture, out of every $100 in sales, about $19.50 became EBITDA in 2019, slightly down from $20.70 a year earlier. One important note: EBITDA is not a standard line item under accounting standards, so each company’s “recipe” can differ. Some include other income, some don’t. So before comparing two companies’ EBITDA, make sure the ingredients really are the same.
Why Are Depreciation and Amortization Added Back?
Depreciation and amortization are added back in EBITDA because both are accounting charges that spread the cost of an asset over several years, not cash payments to anyone else in the year the charge is recorded. Depreciation applies to tangible assets such as machinery and vehicles, while amortization applies to intangible assets such as licenses or software.
Back to our motorbike driver: the bike bought three years ago doesn’t take money out of the wallet today, but the tires, chain, and engine still wear down with every ride. One day, all of that has to be replaced with real money. The same goes for companies. The $259 depreciation charge in our example signals that danieel.id Company’s productive assets are slowly being “used up” and will eventually require capital expenditure.
Legendary investor Warren Buffett once poked fun at this in his 2000 letter to Berkshire Hathaway shareholders: “References to EBITDA make us shudder—does management think the tooth fairy pays for capital expenditures?” The jab is sharp, but the message is simple: a large EBITDA doesn’t necessarily mean small capital spending needs. This is one of the most overlooked parts of EBITDA vs net profit: net profit has already “paid” for asset wear and tear, while EBITDA has not.
EBITDA vs Net Profit in One Table
The difference between EBITDA and net profit lies in where each one stops on the income statement: EBITDA stops before interest, taxes, depreciation, and amortization, while net profit sits on the very last line after all of them are counted. To make it easier to see, here is a summary using danieel.id Company’s 2019 figures:
| Aspect | EBITDA | Net profit |
|---|---|---|
| What it measures | Core operating ability | Bottom-line profit for owners |
| Interest and taxes | Not yet deducted | Already deducted |
| Depreciation and amortization | Added back | Reduce profit |
| 2019 example | $1,194 | $560 |
| Main use | Comparing operating performance | Basis for EPS, dividends, retained earnings |
The gap between the two, $634, is no mystery. It equals interest of $199 plus taxes of $187 plus depreciation and amortization of $259, minus other income of $11. In other words, out of every $100 of EBITDA, only about $47 ends up as net profit. The wider this gap, the heavier the burden of debt, taxes, or assets the company carries.
When Is EBITDA More Useful?
EBITDA is more useful when we compare the operating ability of several companies in the same industry that have different debt structures, tax burdens, or asset ages. Imagine two cement makers: one has just built a plant with heavy borrowing, while the other runs an old plant that is fully paid off. Their net profits can be very different, even though their operating ability may be similar.
Lenders also often use EBITDA to assess the ability to pay interest. In our example, EBITDA of $1,194 is roughly 6 times the interest expense of $199, so the company still has plenty of breathing room. More on borrowing costs can be found in the article on how to calculate cost of debt.
However, EBITDA is not cash flow. It does not account for changes in working capital, interest and tax payments, or capital expenditure. That is why a company’s health should also be tested through its cash flow statement. Even the US capital markets regulator is cautious: SEC guidance on non-GAAP measures asks that EBITDA presented as a performance measure be reconciled to net income, and prohibits presenting it on a per-share basis.
When Is Net Profit More Relevant?
Net profit is more relevant when we assess the final result for shareholders, because this figure is the basis for calculating earnings per share (EPS), dividends, and retained earnings. In our example, 2019 net profit of $560 minus preferred stock dividends of $30 leaves $530 in earnings available for common stockholders.
That $530 is then divided by 300,000 common shares outstanding, giving an EPS of $1.77. And here is the answer to the puzzle at the start of this article. In 2018, there were only 280,000 shares. Earnings did rise by about 5% (from $506 to $530), but the number of shares grew by about 7%. The cake got bigger, but even more people joined the table, so each slice got smaller. Dividends per share also fell, from $0.55 to $0.52.
This is another side of EBITDA vs net profit: EBITDA will never reveal an effect like this, because it stops long before shareholder matters come into play. That said, net profit has weaknesses too. A single year’s net profit can be pushed up or dragged down by one-off items, such as a gain on an asset sale or a foreign exchange loss. So net profit isn’t the same as cash either.
Reading Both Together with Cash Flow and Ratios
The safest way to read EBITDA and net profit is to use both together, then test them against the cash flow statement and a few financial ratios over several years. That way, EBITDA vs net profit becomes a helpful tool rather than a source of confusion. A few simple questions we can ask:
- What is the EBITDA margin trend? In our example it fell from 20.7% to 19.5%, a sign that costs grew faster than sales.
- What is the net profit margin trend? It fell from about 9.8% to 9.2%, in line with the EBITDA margin.
- How many times does EBITDA cover interest? About 6 times; worth watching if debt keeps growing.
- Does operating cash flow support the profit? Compare it with the capital expenditure needed as well.
- Is the share count growing? If so, EPS can fall even while profit rises.
Other ratios such as ROA and ROE will complete the picture; they are explained in the article on company financial ratios. In Indonesia, reading these numbers will, insyaAllah, become easier. PSAK 118, which adopts IFRS 18, applies to annual periods beginning on or after 1 January 2027. According to a Fortune Indonesia report (in Indonesian), the standard requires subtotals for operating profit and for profit before financing and income taxes, plus disclosure of management-defined performance measures. The IFRS 18 key terms likewise stress that management’s own performance measures need to be explained.
Frequently Asked Questions about EBITDA and Net Profit
EBITDA vs net profit: what’s the short answer?
EBITDA is profit before interest, taxes, depreciation, and amortization, while net profit is profit after all of those costs are deducted. EBITDA is better for judging operating strength, net profit for judging the final result for owners.
Is EBITDA the same as cash flow?
No. EBITDA does not account for changes in working capital, interest and tax payments, or capital expenditure, so the cash actually coming in can be much smaller. To see the real cash position, use the cash flow statement.
Why can EBITDA be positive while the company still makes a loss?
This happens when interest, taxes, depreciation, and amortization are larger than EBITDA. It is common in companies with expensive assets or heavy debt, such as a business that has just built a factory or an infrastructure network.
Is EBITDA required in financial statements in Indonesia?
No; EBITDA is not a subtotal required by accounting standards. Starting with 2027 annual periods, PSAK 118 instead requires subtotals for operating profit and for profit before financing and income taxes, while management’s own performance measures must be explained in the notes to the financial statements.
So, Which One Matters More?
Both matter. EBITDA vs net profit isn’t about which one is better, but about which question we are asking. In essence, danieel.id Company’s EBITDA of $1,194 shows an operating engine that still has power, while its net profit of $560 shows what remains after interest, taxes, and asset wear are counted. And the falling EPS reminds us that rising profit doesn’t always mean a bigger share for each stockholder.
Like our motorbike driver, working hard matters, but whether there is anything left to save depends on what remains after loan interest, servicing, and taxes are paid. The first step is simple: open the financial statements of a company you know, find the operating profit and the depreciation and amortization expense, then calculate its EBITDA yourself and compare it with net profit.
If you were weighing two stocks, which number would you usually look at first: EBITDA, net profit, or cash flow? I’d love to hear your answer in the comments.
Happy calculating, and keep reading the numbers critically.
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