Let’s be honest, most financial jargon sounds like it was invented by accountants trying to keep normal people out of the stock market. But if you are investing on platforms like EasyEquities or stalking JSE company news like your ex’s new partner, you have probably come across terms like EBITDA, Net Profit Margin, and Free Cash Flow.
If these words make you feel like you are back in Grade 10 accounting next to the kid who smelled like two-minute noodles and regret, don’t worry. You are not alone. The good news? These three terms are not as scary as they sound. In fact, understanding them can help you spot which companies are printing money and which ones are just good at faking it.
Let’s unpack it. No textbooks required.
EBITDA: The Pre-Drama Profit Number
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. Sounds fancy, right? But really, it is just the company’s profit before the finance gremlins show up.
Think of EBITDA like a clean selfie before filters, debt repayments, and government interference are layered on. It shows you how much a business is making from its actual operations. Forget what they owe or how much SARS is lurking with a calculator. EBITDA answers one simple question: Is this business making decent money before all the chaos?
Why should you care?
Because when you are comparing two companies, especially in the same industry, EBITDA helps level the playing field. Strip away tax tricks and debt drama, and you get a sense of which company is actually running a decent operation.
If Company A has high EBITDA and Company B’s EBITDA is so low it’s practically in the friend zone, you already know where to swipe right.
Net Profit Margin: The “How Much Did You Actually Make?” Metric
So a company made R100 million in revenue. Lekker. But if, after paying salaries, electricity (and Eskom’s regular donations to darkness), rent, and taxes, they only walk away with R2 million? That is not so lekker.
This is where Net Profit Margin comes in.
It tells you what percentage of a company’s revenue ends up as actual profit. In other words, how much money is left in the till after everyone else had their turn.
The Formula:
Net Profit Margin = (Net Profit ÷ Revenue) × 100
If a company’s net profit margin is 10 percent, that means they keep 10 cents for every rand they make. The rest goes to costs, taxes, and probably a finance department that thinks coffee is a personality trait.
Why it matters:
Net Profit Margin tells you if a company is good at converting sales into actual earnings. A business that brings in R10 million but keeps R5 million is far more efficient than one that brings in R100 million and keeps R1 million. Bigger isn’t always better. Just ask anyone who has tried to reverse a bakkie in a tight Joburg parking lot.
Free Cash Flow: The Money You Can Actually Use
Now this one is special. Forget profit on paper. Free Cash Flow (FCF) is the money a company actually has in the bank after all expenses and investments have been handled.
Not projected income. Not funny accounting numbers. Real, actual moola.
Free Cash Flow is what a company can use to pay dividends, reduce debt, reinvest, or survive another quarter of dodgy Eskom timelines and load shedding schedules. A company with strong FCF is not just profitable, it is liquid. And in finance, being liquid is like being able to braai in the rain without the fire dying. It means you are built different.
The takeaway:
If EBITDA is the engine, and net profit margin is the fuel efficiency, then free cash flow is what you have left in your wallet after the road trip. No one wants to invest in a company that looks rich on paper but is broke by payday.
How to Actually Use These in SA Investing
You are not reading this to pass a test. You want to know how to use these metrics to stop throwing your money into shares that promise Lambos but deliver loaf bread.
So here is how:
Start with EBITDA to see if the business model actually works.
Check the Net Profit Margin to see how much revenue becomes actual money.
Then look at Free Cash Flow to find out if they have the cash to do anything useful with those profits.
If all three are strong and trending upwards, you might just be onto a winner. If not, move on faster than you scroll past political ads on YouTube.
The Stokvel Starter Pack of Stock Lingo
EBITDA shows how profitable the business is before tax and debt mess things up
Net Profit Margin shows how efficient they are at turning revenue into real money
Free Cash Flow shows if there is actual cash left once the bills are paid
Know these three, and you will sound like the clever one in your investing WhatsApp group, not the oke who only shares memes and random TikTok stocks.
Last Word
EBITDA, net profit margin and free cash flow are not the holy trinity of investing, but they are definitely the first three tools every South African retail investor should keep in their mental toolbox. They cut through the marketing fluff and give you a peek under the hood of any JSE-listed company.
And no, using them does not mean you need to become the person who quotes Warren Buffett at dinner parties. It just means you are investing like someone who actually knows what they are doing.
Disclaimer
While my jokes may be more Dad than actual Dad jokes, remember: This is not financial advice. Do your own research, chat to a licensed advisor.