EBITDA = operating income + depreciation + amortisation
Interest and tax are already outside operating income. The additions are the two non-cash charges.
Why anyone uses it
It approximates cash generation from operations and strips out financing structure and tax jurisdiction, which makes two businesses more comparable than net income does.
For asset-heavy businesses that is a genuine service. For software, less so: there is not much heavy machinery to depreciate, so the add-back is smaller and the metric is closer to operating income than it is in other industries.
The amortisation add-back is the contentious part
Where a company capitalises software development, that spend leaves the income statement as an expense and returns as amortisation. EBITDA then adds it back, so the cost of building the product disappears from the metric entirely.
Two companies with identical development spend report very different EBITDA depending purely on how much they capitalise. That is an accounting policy choice, not a performance difference.
Check the capitalisation policy before comparing EBITDA between software companies. It is usually in the notes and it is usually where the gap lives.
Adjusted EBITDA is where comparability ends
Adjusted EBITDA adds back further items, most commonly:
- Stock-based compensation. The largest by far in software, and genuinely a
cost: it is real dilution paid to employees instead of cash.
- Restructuring and one-offs, which are one-off with suspicious regularity.
- Acquisition costs.
Every company adjusts differently, so adjusted EBITDA is only meaningful with the reconciliation to operating income beside it. Without it, the number is not comparable to anything.
A worked example
Operating income −$720,000, depreciation $140,000, amortisation of capitalised development $610,000, stock compensation $980,000.
EBITDA = −720,000 + 140,000 + 610,000 = $30,000
Adjusted EBITDA = 30,000 + 980,000 = $1,010,000
The same quarter reads as a $720,000 operating loss, roughly break-even, or a $1m profit, depending which line is quoted. All three are defensible. Only one is usually on the slide.
The traps
- Comparing across different capitalisation policies.
- Treating adjusted EBITDA as comparable without the reconciliation.
- Reading it as cash flow. It ignores working capital and capital expenditure.
- Using it where operating margin
would answer the question more honestly.
Where this sits
EBITDA is Measurement in the Tenbound Pipeline Architecture Standard and is a financial reporting measure rather than an operating one. It is included because it appears in board packs beside pipeline numbers, and knowing what it excludes is the difference between reading it and being led by it.