What is EBITDA and why does it matter?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's core operational profitability by stripping out financing decisions (interest), tax jurisdiction effects (taxes), and non-cash accounting charges (D&A). It is the most widely used metric for business valuation, M&A due diligence, and debt covenant compliance.
How is EBITDA different from operating profit?
Operating profit (EBIT) = Revenue - COGS - Operating Expenses. EBITDA = EBIT + Depreciation + Amortization. The only difference is the add-back of non-cash charges. EBITDA is higher than EBIT because D&A is added back. EBITDA is commonly used as a proxy for operating cash flow, though it ignores capital expenditure requirements.
What is a good EBITDA margin?
EBITDA margin benchmarks vary by industry. SaaS companies target 20-30%+ at scale. Professional services typically run 15-25%. Manufacturing runs 12-18%. Retail is often 5-10%. Healthcare services typically run 10-15%. Any EBITDA margin above 20% is generally considered strong for most service businesses.
Yes. A negative EBITDA means the business is losing money at the operational level before any financing or tax considerations. This is common for early-stage companies investing heavily in growth. Investors will accept negative EBITDA if the business is growing rapidly and the path to positive EBITDA is clear and credible.