EBITDA

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operational profitability by excluding financing decisions, tax strategies, and non-cash accounting charges.

EBITDA shows how much cash profit your core business operations generate before capital structure and accounting adjustments. It's widely used for company comparisons and valuation.

Why EBITDA Matters

EBITDA strips out factors that vary between companies but don't reflect operational performance. Two companies with identical operations might have different net income due to different debt levels, tax situations, or depreciation schedules. EBITDA makes them comparable.

Acquirers often value companies as a multiple of EBITDA. SaaS companies might trade at 10-20x EBITDA, while traditional businesses trade at 5-10x.

EBITDA Limitations

EBITDA ignores real costs like interest payments and capital expenditures. A company with heavy debt or equipment needs might look profitable on EBITDA but struggle with cash flow. Always look at EBITDA alongside other metrics.

Annual financials:

• Revenue: $5,000,000
• Operating expenses: $4,200,000
• Operating income: $800,000
• Depreciation: $100,000
• Amortization: $50,000

EBITDA = $800,000 + $100,000 + $50,000 = $950,000

EBITDA Margin = $950K ÷ $5M = 19%