As a SaaS business owner, the value and profitability of your company are always on your mind, especially in the early stages. There could be situations where you ignore overall profit declines or are unaware of your specific metrics, both of which run your company without reliable metrics.
In any case, several formulas can help you assess the profit margin of your company that will tell you how much value your software company holds. Calculating EBITDA is one such metric that business owners use to measure growth and profitability.
What is EBITDA?
EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization”. It seems like a complex term, but broken down it is a calculation for profitability. It is sometimes an alternative to net income or operating cash flow.
EBITDA is the figure that takes the total revenue, subtracting company costs from it, and adds back in interest, taxes, and depreciation values. Knowing this figure helps companies to evaluate themselves against similar businesses and industry averages. EBITDA is also often discussed when considering the sale of a company because it gives buyers a good idea of its ability to generate cash flow.
How to Calculate EBITDA
To calculate EBITDA, you should already have all the data sets you need on the company’s income statement and balance sheet. There are two ways to calculate EBITDA.
These two formulas may yield different results because Net Income may include various factors than Operating Income, such as one-time expenses and non-operating costs.
Starting with Net Income, the formula is:
EBITDA= Net Income + Interest + Taxes + Depreciation + Amortization
Because you can calculate Net Income without interest and taxes, you must first add them back to the amount.
Starting with operating income, the formula is:
EBITDA= Operating Income + Depreciation Expense + Amortization Expense
Because you can calculate Operating Income before you subtract interests and taxes, there are not more steps to the process.
The Rule of 40
Knowing the EBITDA of your company is necessary for finding another necessary calculation: The Rule of 40. This number is a well-known figure in the SaaS Industry that assesses the health of your SaaS Business.
The formula says that if you add together your revenue growth rate and EBITDA profit margin, and if their sum equals more than 40%, your company is healthy and doing well.
The Rule 40 still applies to companies with low or negative profits because they may have high enough growth rates to counterbalance them—for example, start-ups seeking to maximize customer acquisition costs. The opposite is also true for slow-growing companies that have significant profits.
The median EBITDA margin for publicly traded SaaS Companies typically sits around 37%, meaning just under half of the companies meet the Rule of 40.
The Trouble with EBITDA
Many business owners may not choose to rely on the EBITDA measurement because there are a few drawbacks. EBITDA is not a Generally Accepted Accounting Principal (GAAP). Therefore, many companies may calculate it differently. Buyers can also be wary of committing to companies that highly advertise EBITDA because this number can downplay and distract from rising costs in financial statements.
We Boost Your SaaS Company with an EBITDA Margin
Our team at RevTek Capital understands how crucial EBITDA margins are to the health and revenue increase of your SaaS company. By taking a capital investment to increase sales and marketing dollars or diversify your customer service options to drive up profits, RevTek can help you boost your company’s growth.
We make it our aim to accelerate your business growth and would love to show you how by helping you calculate your EBITDA. No successful SaaS business CEO has ever run their company without taking financial metrics and statistics into consideration. Call today at 480.332.0399 so we can evaluate your company earnings and help you determine your company’s next growth steps.