What is EBITDA?
EBITDA is earnings before interest, taxes, depreciation, and amortization. It is a measure of core operating earnings that removes financing decisions and non-cash accounting charges.
The point is comparability. By stripping out interest, taxes, and depreciation, EBITDA lets you compare the operating performance of businesses with very different capital structures and tax situations.
The EBITDA formula.
There are two routes to the same number. From the bottom up, EBITDA = net income plus interest plus taxes plus depreciation and amortization. From operating income, EBITDA = EBIT plus depreciation and amortization.
This tool does both, and a third mode for the margin. EBITDA margin is EBITDA divided by revenue, which expresses operating profitability as a percentage.
A worked example.
A company has 50,000 in net income, 10,000 in interest, 15,000 in taxes, and 25,000 in depreciation and amortization. EBITDA is the sum, 100,000. On 400,000 of revenue, that is a 25% EBITDA margin.
What is a good EBITDA margin?
It varies widely by industry, so there is no single benchmark. Mature software businesses can post high EBITDA margins because their costs are largely fixed, while capital-intensive businesses run much lower. The fair comparison is to peers and to the company's own trend.
EBITDA is useful but incomplete, because it ignores capital spending and working capital. Reading it next to how gross margin compares gives a fuller view of where profit comes from.
How to read it.
Treat EBITDA as a proxy for operating earnings, not for cash. A business can show strong EBITDA and still be tight on cash once capital spending and debt are accounted for, so pair it with cash flow before drawing conclusions.
One quiet input to margin is what it costs to win customers. When acquisition leans less on paid channels, more of each dollar reaches the bottom line, which is the case for reducing acquisition costs that drag on profit.