Financial & Unit Economics

EBITDA EBITDA

CFO CEO COO

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a widely used measure of core operating profitability that strips out the effects of financing decisions, tax environments, and non-cash accounting charges. It is the most common metric used in company valuation (EV/EBITDA multiples) and LBO analysis. For SaaS companies, EBITDA is often replaced or supplemented by free cash flow because capex is minimal.

Non-GAAP EBITDA in tech companies often also excludes stock-based compensation, which can be significant; always clarify whether EBITDA figures include or exclude SBC when making comparisons.

Formula

Net Income + Interest + Taxes + Depreciation + Amortization

Where It Lives

NetSuiteEBITDA P&L reporting with depreciation schedules
QuickBooksIncome statement with D&A line items for EBITDA calculation
MosaicEBITDA forecasting and scenario planning
CartaCap table and SBC tracking for non-GAAP EBITDA adjustments

What Drives It

Revenue growth increasing the numerator
Operating cost control across all departments
Gross margin improvement reducing COGS impact
D&A schedules from capital investments
SBC levels affecting non-GAAP EBITDA adjustments

Causal Analysis: EBITDA changes can be decomposed into revenue-driven and cost-driven components to identify which management actions are causally improving or degrading profitability.

Benchmark

Mature software companies trade at 10–20× EBITDA; growth SaaS companies often have negative EBITDA and are valued on revenue multiples instead.

Common Mistake

Treating EBITDA as equivalent to cash flow; EBITDA ignores working capital changes, capex requirements, and cash interest payments that materially affect actual cash generation.

How different roles think about this metric

Each function reads EBITDA through a different lens and takes different actions when it changes.

CFO

The CFO uses EBITDA as the primary metric for lender covenants, credit facility negotiations, and M&A valuation conversations.

CEO

The CEO communicates EBITDA to investors as the proxy for operational profitability, distinguishing between GAAP and non-GAAP figures when presenting.

COO

The COO manages the operational cost base that determines EBITDA and drives efficiency programs to improve EBITDA margin over time.

Common Questions About EBITDA

Click any question to expand the answer.

Why is EBITDA used for company valuation?

EBITDA is used because it removes variables that differ across companies and capital structures: interest expense (how a company is financed), taxes (jurisdiction and structure), and depreciation (accounting policy for assets). This makes EBITDA more comparable across companies. EV/EBITDA multiples allow investors to compare the operational value of businesses regardless of their financing or tax situations.

Why do SaaS investors often prefer free cash flow to EBITDA?

SaaS companies have minimal capex, so D&A add-backs in EBITDA are small. However, SaaS businesses often collect annual subscription payments upfront, generating strong cash flow even when GAAP revenue recognition is deferred. Free cash flow captures this working capital benefit while EBITDA does not. FCF margin is therefore a more accurate reflection of the actual cash economics of a SaaS business.

What is adjusted EBITDA and what gets added back?

Adjusted EBITDA starts with EBITDA and adds back non-recurring or non-cash items: stock-based compensation, one-time restructuring charges, M&A costs, and litigation expenses. The goal is to show the normalized, ongoing earnings power of the business. However, SBC add-backs are controversial because SBC is a real economic cost to shareholders even though it is non-cash.

How does EBITDA relate to LBO (leveraged buyout) analysis?

Private equity firms use EBITDA as the basis for LBO modeling because debt service capacity is primarily a function of cash earnings before financing costs. A company with $10M EBITDA can support roughly $50M–70M of debt at standard LBO leverage ratios. EBITDA growth post-acquisition, combined with debt paydown, drives equity value creation in the buyout model.

Related Metrics

Metrics that are commonly analyzed alongside EBITDA.

Operating Margin | Operating Margin GM% | Gross Margin FCF | Free Cash Flow Burn Rate | Burn Rate

Role guides that include this metric

See how each role uses EBITDA in context with the full set of metrics they own.

CFO Guide → CEO Guide → COO Guide →

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