EBITDA is earnings before interest, tax, depreciation and amortisation — a proxy for a SaaS business's core operating profitability.
EBITDA = net profit + interest + taxes + depreciation + amortisation (equivalently, operating profit + depreciation + amortisation)
A SaaS business posts £400,000 net profit, with £50,000 interest, £120,000 tax, and £80,000 of depreciation and amortisation.
£400,000 + £50,000 + £120,000 + £80,000 = £650,000 EBITDA
EBITDA — earnings before interest, taxes, depreciation, and amortisation — strips four items out of net profit to approximate how profitable the core operations are. Removing interest neutralises how the business is financed, removing tax neutralises jurisdiction, and removing depreciation and amortisation removes large non-cash charges tied to past spending. What is left is meant to be a cleaner, more comparable read on operating performance.
For SaaS, EBITDA has real uses and real blind spots. It is the margin most commonly plugged into the Rule of 40, and it makes companies with different debt loads and tax positions comparable. But it deliberately ignores the cash side of the business: it adds back non-cash charges yet says nothing about the upfront cash that annual billing pulls forward, which is why free cash flow often tells a more favourable SaaS story than EBITDA.
Treat EBITDA as a proxy, not the truth. Warren Buffett and others have long criticised it for ignoring the real cost of capital expenditure and for inviting "adjusted EBITDA" definitions that quietly add back genuine operating costs like stock-based compensation. It is a useful lens for operating profitability, but it is not cash, not profit, and not a substitute for either.
EBITDA is the most common shorthand for operating profitability and the default margin behind the Rule of 40, so investors and acquirers lean on it to compare businesses with different financing and tax. Its weakness is that it ignores capex and the cash timing that defines subscription economics, which is why it is best read alongside free cash flow rather than trusted on its own — especially once "adjusted" versions start adding real costs back.
EBITDA margins widen with scale: mature, profitable public SaaS commonly run 20–30%+ EBITDA margins, while most still-growing private SaaS sit near break-even or negative as they invest. On an EBITDA basis only roughly 15–30% of public SaaS clear the Rule of 40 in recent years (sources: Bessemer Cloud Index; KeyBanc/Meritech SaaS surveys).
Net profit is the bottom line after every cost; EBITDA adds back interest, tax, depreciation, and amortisation to approximate operating profitability before financing and accounting choices. EBITDA is usually higher than net profit because those deductions are added back, though it can dip below net profit in the rare case of net interest income or a net tax benefit, where the add-backs are negative.
No. EBITDA adds back non-cash charges but ignores capital expenditure and working-capital swings, so it is not cash. Free cash flow is the truer cash measure, and for SaaS it often runs higher than EBITDA thanks to upfront annual billing.
Either, as long as you state which. EBITDA and free-cash-flow margins can put the same company on opposite sides of the line — far more SaaS pass on an FCF basis because annual contracts collect cash upfront. See the Rule of 40 for the trade-off.
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