EBITDA
ee-BIT-dah
Earnings before interest, taxes, depreciation, and amortization. A proxy for operating cash flow that strips out accounting and financing effects.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is a way to measure a company's profitability from operations without the noise of tax strategies, financing decisions, and accounting rules for asset depreciation.
For SaaS companies, EBITDA is close to operating margin because most SaaS companies have minimal depreciation and amortization. The main difference appears when a company has significant capitalized software development costs (which get amortized) or has made acquisitions (which create goodwill amortization).
Investors and acquirers use EBITDA as a valuation metric. A company might be valued at 15x EBITDA. If your EBITDA is $10M, your enterprise value would be $150M. This is more common for mature companies. High-growth SaaS companies are typically valued on revenue multiples instead, because they do not have positive EBITDA yet.
Examples
A company calculates EBITDA.
Revenue: $30M. Operating expenses: $28M. Operating income: $2M. Depreciation: $1M. Amortization: $500k. EBITDA: $3.5M. EBITDA margin: 11.7%. The company is modestly profitable on an EBITDA basis even though operating margin is only 6.7%.
Using EBITDA for acquisition valuation.
A private equity firm wants to acquire a $20M ARR SaaS company with $4M EBITDA. They offer 12x EBITDA ($48M). The founder counters that growing SaaS companies should be valued on revenue multiples (8x revenue = $160M). The final price lands at $90M, between the two approaches.
Adjusted EBITDA in startup reporting.
A startup reports "adjusted EBITDA" of $2M by excluding $3M in stock-based compensation from its -$1M operating loss. Investors know stock-based compensation is a real cost but it is non-cash. Adjusted EBITDA gives a view of cash profitability. Smart investors look at both.
In practice
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Frequently asked questions
Why do people use EBITDA instead of net income?
Net income is affected by tax strategies, debt structures, and accounting choices that vary between companies. EBITDA strips those out, making it easier to compare operating performance across companies with different capital structures and tax situations.
What is a good EBITDA margin for SaaS?
20-30% for a mature SaaS company. High-growth companies often have negative EBITDA margins because they are investing in growth. Investors care more about the trajectory: is EBITDA margin improving as revenue grows? Rule of 40 applies here too.
Related terms
Revenue minus all operating expenses, expressed as a percentage. Shows how much profit your core business generates before interest and taxes.
The accounting rules for when you can count revenue as earned. Not when you sign the deal or collect the cash, but when you deliver the service.
Revenue minus cost of goods sold, expressed as a percentage. For SaaS, this is revenue minus hosting, support, and delivery costs.
The actual movement of cash in and out of your business. Different from revenue because it includes timing of payments, not just accrual accounting.
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