Software Growth

EBITDA

EBITDA is earnings before interest, taxes, depreciation and amortization. It approximates operating profit before financing, tax and non-cash charges.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It strips out financing choices, tax rules and non-cash accounting charges so you can compare operating performance across companies. Investors and buyers often use it to value profitable software businesses, and it is a common profit input for the Rule of 40.

How to calculate EBITDA

The Baremetrics guide gives the equivalent form, EBITDA equals EBIT plus depreciation and amortization, where EBIT is revenue minus COGS minus operating expenses.

Example: a SaaS business has $400,000 revenue, $100,000 COGS, $250,000 operating expenses excluding D&A, and $20,000 of depreciation and amortization.

EBITDA margin is $50,000 divided by $400,000, which is 12.5%. If interest is $5,000 and taxes $5,000, net income is $20,000, and adding back all four items returns $50,000.

Why SaaS companies use it

Software companies often capitalize development costs and later amortize them, so net income can understate how the business is performing day to day. EBITDA gives a view of operations before those charges. Baremetrics notes it is particularly useful for companies with heavy upfront product investment.

What it misses

SaaS Capital makes the case that EBITDA is not a good proxy for operating cash flow. Interest and taxes are real cash payments, and amortization does not always match what you actually spend on capital items. Subscription businesses also get cash from annual prepayments. When growth slows, that cash benefit shrinks, and a company can burn cash even while its EBITDA looks better. For the cash picture, look at free cash flow and burn rate.

Adjusted EBITDA

Many companies report adjusted EBITDA, which also adds back stock-based compensation and one-time costs. It can flatter results, so ask what was excluded before comparing.

For small SaaS

  • When you sell a small profitable product, buyers often price it as a multiple of earnings, so keeping clean books and a clear EBITDA matters. For owner-operated products, seller's discretionary earnings is a common alternative.
  • Pay yourself a market salary in the calculation, or your EBITDA will overstate real profit.
  • Compare operating margin and EBITDA margin on the same basis.

Sources

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