EBITDA vs Net profit
EBITDA is earnings before interest, tax, depreciation and amortisation: roughly, what the core business earns from operations. Net profit is what is left after every cost, including interest, tax and depreciation, and it is what finally belongs to shareholders. EBITDA shows operating strength; net profit shows what owners actually get.
| Point | EBITDA | Net profit |
|---|---|---|
| Full meaning | Earnings before interest, tax, depreciation and amortisation | Profit after all expenses, interest and tax |
| Position in P&L | Near the top, after operating costs | The bottom line |
| Affected by debt | No | Yes, interest reduces it |
| Affected by asset wear | No | Yes, depreciation reduces it |
| Useful for | Comparing operations across companies | EPS, P/E and returns to shareholders |
| Main trap | Ignores real costs of debt and equipment | Can be lifted by one-off gains |
Walking down the P&L
Start with sales. Subtract raw materials, salaries and other running costs, and you get EBITDA. Subtract depreciation (the wearing out of machines and buildings) and amortisation (the same for intangible assets) to get EBIT, or operating profit. Subtract interest to get profit before tax. Subtract tax to reach net profit.
A worked example
Say a company has sales of ₹1,000 crore and running costs of ₹800 crore. EBITDA is ₹200 crore, a 20% EBITDA margin. Depreciation is ₹60 crore, leaving ₹140 crore. Interest is ₹70 crore, leaving ₹70 crore before tax. After an assumed 25% tax, net profit is about ₹52 crore.
The EBITDA of ₹200 crore sounds healthy, but heavy equipment and heavy debt take most of it. Shareholders end up with about a quarter of it.
Where each one misleads
EBITDA leaves out real costs. Machines do wear out and must be replaced, and interest must be paid in good years and bad. A company that talks only about EBITDA while net profit stays weak deserves questions.
Net profit can be flattered by one-off items, like selling a property. Check whether it came from the regular business. Comparing both with cash from operations gives the clearest picture.
When to use which
Use EBITDA to compare how well companies run their operations, especially in capital-heavy sectors. Use net profit to see what shareholders actually earn, and to calculate EPS and P/E. Read both, and check that cash flow backs them up.
Common questions
Is EBITDA the same as operating profit?
Not exactly. Operating profit (EBIT) is EBITDA minus depreciation and amortisation.
Why do companies highlight EBITDA?
It is usually a bigger number and ignores debt and asset costs, so it can make results look stronger. It is useful, but never the whole story.
Which is better for valuing a company, EBITDA or net profit?
Net profit is used for P/E. EBITDA is used for comparisons across companies with different debt levels. Looking at both is safest.
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