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Objective To determine the associations of WHO/UNICEF Joint Monitoring Program Water, Sanitation and Hygiene (WASH) Service Ladder service levels and sociodemographic factors with diarrhoeal disease among children under 5 years in Bishoftu town, Ethiopia.Design A community-based cross-sectional study.Setting Bishoftu town, Ethiopia, January–February 2022.Participants A total of 1807 mothers with at least one child under 5 years were included. Sociodemographic and WASH variables were collected using a structured questionnaire. 378 drinking water samples were collected.Outcome The response variable was diarrhoeal disease among children under 5 years.Results The 2-week prevalence of diarrhoeal disease among children under 5 years was 14.8%. Illiteracy (adjusted OR 3.15; 95% CI 1.54 to 6.47), occupation (0.35; 0.20 to 0.62), mother’s age (1.63; 1.15 to 2.31), family size (2.38; 1.68 to 3.39), wealth index (5.91; 3.01 to 11.59), residence type (1.98; 1.35 to 2.90), sex of the child (1.62; 1.17 to 2.24), child’s age (3.52; 2.51 to 4.93), breastfeeding status (2.83; 1.74 to 4.59), food storage practice (3.49; 1.74 to 8.26), unimproved drinking water source (8.16; 1.69 to 39.46), limited drinking water service (4.68; 1.47 to 14.95), open defecation practice (5.17; 1.95 to 13.70), unimproved sanitation service (2.74; 1.60 to 4.67), limited sanitation service (1.71; 1.10 to 2.65), no hygiene service (3.43; 1.91 to 6.16) and limited hygiene service (2.13; 1.17 to 3.86) were significantly associated with diarrhoeal disease.Conclusion In this study, diarrhoea among children is a significant health issue. Child’s age, drinking water service, residence type and hygiene service were the largest contributors with respect to the prevalence of diarrhoeal disease. This investigation provides information that could help to inform interventions to reduce childhood diarrhoea. The findings suggest that state authorities should initiate robust WASH strategies to achieve the Sustainable Development Goal 3 agenda.