EBITDA, adjusted EBITDA and real profit

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. In plain terms, it is what the business earns from its operations, ignoring four items: the interest it pays on loans, the income tax it owes, the slow write-off of physical assets such as laptops and machinery (depreciation), and the slow write-off of intangible assets such as software or acquired brands (amortisation).

The idea is to look at the day-to-day business without the effect of how it is financed, where it pays tax, or how old its equipment is. That makes it easier to compare two companies of different ages and with different loans.

There are two common routes that give the same answer. The first starts at the top: take revenue and subtract the operating costs, such as the cost of goods, employee salaries, marketing, rent and technology. What is left is EBITDA. The second starts at the bottom: take the net profit or loss and add back interest, tax, depreciation and amortisation.

A company that earns ₹100 crore in revenue and spends ₹115 crore on operating costs has an EBITDA of minus ₹15 crore. Many Indian startups report a negative EBITDA in their early years, and the size of the loss relative to revenue tells you how far the business is from breaking even.

• EBITDA margin = EBITDA divided by revenue, shown as a percentage.
• Positive EBITDA means the operations earn more than they cost to run.
• Negative EBITDA means the operations still burn cash or are funded by investors.

Adjusted EBITDA is EBITDA after the company removes costs it calls one-time or non-core. Common adjustments are employee stock option expenses, restructuring and layoff costs, legal settlements, acquisition costs and sometimes marketing spent on launching a new business line.

Some adjustments are fair. A one-time legal fee really does not describe the normal business. Others are debatable. Stock options are a real cost of paying employees, even if no cash leaves the company, because they dilute the owners. A company that adjusts away its option costs, its marketing and its restructuring every year may show a healthy adjusted number while the true picture is weaker.

In India, adjusted EBITDA is a management measure and is not defined in accounting standards. Listed companies describe how they reach it in their investor presentations. Private startups may use their own definition in pitch decks and press statements, so the same label can mean different things.

Profit is what remains after every cost, including interest, depreciation, amortisation and tax. A company can have a positive EBITDA and still make a loss. If it borrowed heavily, interest might eat the entire operating earnings. If it spent a lot on equipment, depreciation might do the same.

EBITDA is also not cash flow. A company can report positive EBITDA and still run out of cash if customers pay late, if it must keep buying inventory, or if it must keep spending on new equipment. Cash that goes into stock or into capital spending does not appear in EBITDA at all.

The bottom line to watch is profit after tax, often written PAT, and the cash flow from operations in the annual financials. EBITDA sits between revenue and those two numbers and should be read as a clue, not a conclusion.

For a young company, net profit may be deeply negative for years because of heavy marketing spend, interest and write-offs. EBITDA looks smaller and cleaner, and a move to break-even EBITDA is a milestone a company can announce. Investors use it as a sign that the model works at the operating level. Several Indian consumer internet companies have announced reaching positive adjusted EBITDA in a quarter before they reported a positive net profit.

That milestone is real progress, but it is a step on the way, not the finish. A company that is EBITDA positive may still have unpaid obligations, large depreciation, or share-based pay that will dilute future owners.

Ask five questions. Is the number adjusted, and what was left out? Is it for a quarter or a full year? Is it a percentage of revenue or a rupee figure? How does it compare with profit after tax and with operating cash flow? And does the company report it consistently from one period to the next, or change its definition when results look weak?

A short, clear reconciliation from net loss to adjusted EBITDA is a good sign. A headline without one deserves caution. For a deeper look at how to read the full statements, see the guide on annual financials. This guide is for education and is not investment or tax advice.