What is EBITDA? Your Business's Real Report Card

87% of businesses are profitable on paper but bleeding cash. Sound impossible? That's because most CEOs focus on net income while investors obsess over something else entirely: EBITDA.

Last month, I sat with a founder whose company showed $2M in profits. His EBITDA? Negative $500K. The business was actually losing money on operations, masked by one-time asset sales. This is why EBITDA matters.

EBITDA Decoded for Business Leaders

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

But here's the business translation: EBITDA shows how much money your core operations actually generate, stripping away financial engineering and accounting decisions.

Think of it like checking your car's engine performance without considering the paint job, financing terms, or how old it is. You want to know: does this engine run well?

The formula is surprisingly simple:

  • Start with revenue
  • Subtract operating expenses (salaries, rent, materials, marketing)
  • Stop there (ignore interest, taxes, depreciation, amortization)

What you get is pure operational performance.

Why Investors Care More About EBITDA Than Profit

Here's where it gets interesting. Three companies, same industry, all showing $1M net profit:

Company A: $3M EBITDA, heavy debt (high interest payments) Company B: $2M EBITDA, new equipment (high depreciation)
Company C: $1M EBITDA, no debt, old equipment

Which is the best business? Company A, despite the debt. Why? Their operations generate the most cash. The debt is a financing choice, not an operational weakness.

This is why private equity firms and strategic buyers focus on EBITDA multiples. They can change the capital structure, but they can't easily fix broken operations.

EBITDA Margins by Industry (2025 Benchmarks)

Know where you stand:

SaaS Companies

  • Excellent: 30%+
  • Good: 20-30%
  • Concerning: Below 15%
  • Typical multiple: 8-15x EBITDA

E-commerce

  • Excellent: 15%+
  • Good: 8-15%
  • Concerning: Below 5%
  • Typical multiple: 3-6x EBITDA

Professional Services

  • Excellent: 25%+
  • Good: 15-25%
  • Concerning: Below 10%
  • Typical multiple: 4-8x EBITDA

Manufacturing

  • Excellent: 20%+
  • Good: 12-20%
  • Concerning: Below 8%
  • Typical multiple: 4-7x EBITDA

Your EBITDA margin = EBITDA ÷ Revenue × 100

The Netflix EBITDA Story

Netflix reported negative net income for years while growing explosively. How? Their EBITDA was strongly positive.

2019 Reality:

  • Net Income: -$1.2B (looks terrible)
  • EBITDA: +$2.6B (actually healthy)
  • Difference: Massive content amortization

They were spending heavily on content (showing as amortization) but generating strong cash from operations. Investors who understood EBITDA saw the real story. Stock price during this "unprofitable" period? Up 300%.

When EBITDA Lies (Red Flags)

EBITDA isn't perfect. Watch for these manipulations:

1. The CapEx Shell Game Company claims 40% EBITDA margins but spends 35% of revenue on equipment annually. Real cash generation? Just 5%.

2. The Working Capital Trap Great EBITDA but cash tied up in inventory or receivables. Toys "R" Us had positive EBITDA right until bankruptcy.

3. The One-Time Shuffle Moving regular expenses to "one-time" items to boost EBITDA. If it happens every year, it's not one-time.

4. The Lease Trick Some companies lease everything to reduce depreciation. Compare EBITDAR (includes rent) for a clearer picture.

Your EBITDA Improvement Playbook

Quick Wins (Impact in 30-90 days)

  1. Pricing power test: 5% price increase = direct EBITDA boost
  2. Vendor renegotiation: Target 10-15% reduction on top 5 suppliers
  3. Subscription audit: Cut unused software (typically saves $10-50K/year)
  4. Payment terms: Move from Net 30 to Net 45 (improves cash, not EBITDA, but helps)

Strategic Moves (3-12 months)

  1. Customer mix: Fire unprofitable customers (yes, really)
  2. Operational efficiency: Automate repetitive tasks
  3. Overhead ratio: Keep below 20% of revenue
  4. Gross margin expansion: Focus on higher-margin products/services

Real example: A marketing agency improved EBITDA from 8% to 22% in one year by:

  • Dropping clients under $5K/month (removed 30% of work, only 10% of revenue)
  • Standardizing service packages (reduced custom work by 60%)
  • Offshore partners for production work (cut delivery costs 40%)

EBITDA vs Other Metrics

EBITDA vs Gross Profit

  • Gross Profit = Revenue - COGS
  • EBITDA = Gross Profit - Operating Expenses
  • Use both: Gross for product profitability, EBITDA for company health

EBITDA vs Free Cash Flow

  • FCF = EBITDA - CapEx - Working Capital changes - Taxes
  • FCF is ultimate truth but harder to manipulate
  • EBITDA better for comparing companies

EBITDA vs Net Income

  • Net Income includes everything
  • EBITDA focuses on operations
  • Both matter, but EBITDA drives valuation

The CEO's EBITDA Dashboard

Track these monthly:

  1. EBITDA Margin (target: industry benchmark + 5%)
  2. EBITDA per Employee (shows productivity)
  3. EBITDA Growth Rate (should exceed revenue growth)
  4. EBITDA to CapEx Ratio (must be >2x for sustainability)

Set up alerts when:

  • EBITDA margin drops 2%+ month-over-month
  • EBITDA per employee decreases (efficiency warning)
  • EBITDA growth lags revenue growth (margin compression)

Your Next Steps

EBITDA isn't just an investor metric – it's your operational truth serum. This week:

  1. Calculate your trailing 12-month EBITDA
  2. Compare to industry benchmarks above
  3. Identify your three biggest EBITDA drains
  4. Pick one quick win to implement

Remember: Revenue is vanity, profit is sanity, but EBITDA is reality.

Want to go deeper? Check out Free Cash Flow to understand the full cash picture, or explore Gross Margin to improve product profitability.

Part of the [Business Terms Collection]. Last updated: 2025-01-21