Investors care about EBIT, EBITDA and their margins. These numbers change how people value your startup. Used well, they also change how your team spends, hires, and prices. Outside the pitch deck, they're your tools for running a better business and planning your next move.
Let's break down EBIT, EBITDA, EBIT margin, and EBITDA margin. You'll see how to calculate them, when to use each one, and the common mistakes that can cloud your numbers.
Understanding EBIT, EBITDA, EBIT margin and EBITDA
Start simple. All four measure profitability, but each gives you a different view of your business.
EBIT (earnings before interest and taxes)
EBIT shows your profit from daily operations. It ignores interest and taxes. It's a straightforward measure of how much profit a company makes from its day-to-day operations, without factoring in interest payments on debt or income taxes. It shines a light on operational strength. No noise from financing or taxes.
Use EBIT to answer, "how profitable is our core business?"
EBITDA (earnings before interest, taxes, depreciation, and amortization)
EBITDA takes EBIT and adds back depreciation and amortization. You get EBITDA by adding interest, tax, depreciation, and amortization to net income. Depreciation and amortization are non-cash, so they don't hit your bank balance today.
Depreciation spreads the cost of equipment over its useful life. Amortization does the same for things like patents or software. By adding them back, EBITDA gives you a quick view of how much cash your business generates before you factor in debt or taxes. It’s a proxy for operating cash generation, not cash itself.
EBIT margin and EBITDA margin
Margins turn dollar amounts into easy-to-read percentages. EBITDA margin shows EBITDA as a percent of revenue. This makes comparisons simple across time, and with other companies.
They show how much of every dollar of revenue turns into operating profit.
If your EBITDA margin is 20%, you’re getting 20 cents of EBITDA from every dollar in revenue. Higher margins usually mean you’re running efficiently. Context matters, though. Direction matters, too: improving trend beats a single snapshot.
How these differ from other metrics
EBIT and EBITDA fall between gross profit and net income on your income statement. Gross profit takes out only the cost of goods sold. Net income includes everything: operating costs, interest, taxes, depreciation, and one-offs.
EBIT and EBITDA dive into operations. They skip over financing and tax impacts, so you see how the business performs at its core. No distractions.
Core formulas and calculation variations
You can calculate EBIT and EBITDA in a few ways. The method depends on what data you have and how your financials are set up.
Calculating EBIT
The top-down approach from revenue goes like this:
EBIT = Revenue - Cost of goods sold - Operating expenses (excluding D&A)
Operating expenses cover sales, marketing, R&D, and G&A. Skip depreciation and amortization here.
Or, use a bottom-up method from net income:
EBIT = Net income + Interest expense + Taxes
Pick based on your data. Both give a solid read on how your business runs.
Calculating EBITDA
The go-to formula adds D&A to EBIT:
EBITDA = EBIT + Depreciation + Amortization
Or, start from operating income:
EBITDA = Operating income + Depreciation + Amortization
If you begin at net income, here's what you get:
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
Adjusted EBITDA for startups
Many startups use adjusted EBITDA by adding back one-time or special expenses. Adjusted EBITDA removes non-recurring items and non-cash charges. It shows what earnings look like in a "steady state."
Here’s what’s often adjusted:
- Stock-based compensation
- One-time restructuring costs
- Acquisition expenses
- Non-operating income or losses
- Legal settlements or unique items
The goal is to show investors your true business performance. Stay consistent and avoid using too many adjustments, since it can make numbers confusing. If it’s “one-time” every quarter, it’s not actually one-time.
Calculating the margins
Once you have EBIT and EBITDA, margins are easy:
EBIT margin = (EBIT / Revenue) × 100%
EBITDA margin = (EBITDA / Revenue) × 100%
Stick with percentages. They tell the story faster.
Choosing the right time frame
Calculate margins monthly, quarterly, or annually. Most startups track them monthly inside the company and quarterly or annually for the board and investors.
Monthly shows trends early. Quarterly or annual numbers smooth out any reporting bumps.
Be consistent. If you adjust for stock-based comp in one quarter, do it every quarter. It keeps your numbers easy to follow.
Why these metrics matter for startups
Don’t think of EBIT, EBITDA, and margins as boardroom buzzwords. Use them to make smart decisions about spending, hiring, pricing, and funding.
Operational performance assessment
These metrics show how well you turn revenue into profit. If your EBITDA margin drops, costs might be rising faster than revenue. That means it’s time to adjust spending or rethink your approach.
EBIT and EBITDA cut through the noise from debt or taxes, giving you apples-to-apples comparisons with peers. Even those with different financial structures.
Fundraising and valuation
Investors use EBITDA multiples to set your valuation. A higher EBITDA margin means you’re likely to scale profitably.
During diligence, investors will dig deep into your EBITDA math. They’ll ask about every adjustment. Be transparent. It builds trust fast.
Connection to other financial metrics
EBITDA links with many key startup metrics:
- Cash flow: EBITDA is close to operating cash flow, but not quite. For the real picture, check changes to receivables, inventory, and payables. Read more on cash flow metrics.
- Burn rate: Negative EBITDA drives your burn. Know your loss on core operations. It helps you plan your runway and next raise.
- Unit economics: Company-wide EBITDA margin is the sum of your customer unit economics. If you lose money on each customer, your EBITDA margin will stay negative until efficiency improves or scale hits.
- Path to profitability: Track EBITDA margin over time. Investors want to see it rising, even if you aren’t profitable yet.
Benchmarks by industry and stage
Margins change by industry, business model, and startup stage. SaaS companies usually have higher EBITDA margins, often 20% to 40% at scale (Investopedia). That’s because they’re scalable and have predictable revenue. Early-stage companies might be negative while investing in growth.
Benchmark against companies like yours: same stage, same business model. Don’t compare a new startup to a mature SaaS giant. Marketplace models, for example, run on different margin profiles.
Benchmarks, pitfalls, and best practices
EBIT and EBITDA offer power, but they’re not perfect. Here’s how to keep your numbers strong and your team confident.
Common pitfalls
- Confusing EBITDA with cash flow: EBITDA isn’t cash flow. It skips working capital, capex, and debt.
- Over-adjusting EBITDA: Too many add-backs can inflate your metrics. If certain “one-time” costs show up every quarter, count them as ongoing.
- Inconsistent adjustments period-over-period: Changing your adjustments every quarter weakens your trend line. Keep it steady.
- Ignoring the quality of earnings: High EBITDA alone isn’t enough. If your numbers come from unsustainable revenue, the problem's just hidden.
- Comparing across companies without understanding adjustment differences: Two companies with similar margins can use different adjustments. Always look for the details.
- Using EBITDA margin without context: A 30% margin impresses, but if your competitors are growing revenue much faster, you’re missing the full story.
- Treating depreciation and amortization as fully non-cash: D&A shows prior investments. If you constantly need new equipment or tech, adding D&A back could overstate cash generation.
- Excluding legitimate operating expenses: Only remove true one-offs. Don’t exclude core costs like sales or R&D. Investors will notice.
Best practices for startups
- Be transparent with adjustments. Document every add-back and why it’s there.
- Show adjusted EBITDA for normalized performance, but always share unadjusted EBITDA and net income, too.
- Track trends over time, not just one quarter’s metric.
- Combine EBITDA with other key metrics (ratios, cash flow, and unit economics) for the full story. Here’s more on financial ratios.
- Review your calculations often. If your business changes, update your approach.
Using Runway to track and analyze EBIT, EBITDA and their margins
Manual calculation eats up your time. You pull data every month, check account maps, and tweak formulas, hoping you didn’t miss something.
Runway automates all of it. Connect your accounting system, build your P&L once, and watch EBIT, EBITDA, and margins update automatically as new numbers come in.
Connect your data and build your P&L
First, connect your accounting system to Runway such as QuickBooks Online, Xero, NetSuite, or others. Runway pulls your income statement data and creates databases with accounts, amounts, etc. Next, create dimensions like account type, class, and vendor to slice & dice your data.
Then build your P&L hierarchy by mapping GL accounts to reporting categories: revenue, COGS, sales & marketing, R&D, G&A, and depreciation & amortization. The right mapping makes your EBIT and EBITDA numbers accurate and reliable.
Runway's lookups handle the mapping. You assign accounts once, and they're correct for every period going forward. When new accounts show up, you map them quickly without rebuilding anything from scratch.
Set up formulas for EBIT, EBITDA, and margins
With your P&L ready, create drivers using Runway's formula editor:
For EBIT, subtract COGS and operating expenses (excluding D&A) from revenue:
EBIT = total revenue - COGS - operating expenses ex-D&A
For EBITDA, add D&A back to EBIT:
EBITDA = EBIT + depreciation & amortization
Margins use division:
EBIT margin = EBIT / total revenue
EBITDA margin = EBITDA / total revenue
Runway's formula editor lets you filter for specific accounts, like "account type = revenue" or "reporting category = depreciation & amortization." You can combine filters and use standard operators to build clean, maintainable formulas. Then format your drivers as currency or percentages so everything displays the way you need.
Handle actuals and forecasts
Runway separates actuals from forecasts. Set your last close date to tell Runway which months use actual data and which use forecasts.
You can use the same formula for both time periods. When you want to model scenarios, override forecast formulas. Adjust expenses, test growth assumptions, or remove one-time items without touching your actuals.
Create adjusted EBITDA variants
Track adjusted EBITDA by adding drivers for things like stock-based compensation or one-time expenses. Expand your formula:
Adjusted EBITDA = EBITDA + stock-based comp + one-time expenses
Filter your GL data to pull the accounts you need. Your calculations update automatically when new data comes in.
Visualize and share with your team
Runway displays your P&L with EBIT, EBITDA, and margins in a clear, organized drivers table. Set rollups by quarter or year, and format numbers as currency or percentages.
Drill into any metric to see what's behind it. If your EBITDA margin drops, click through to the category or account level to find out why.
Share reports in real time. Use collaborative forecasting to keep your team, board, or investors aligned. Everyone works from the same numbers.
Use cases beyond reporting
With EBIT and EBITDA built in Runway, you can model strategic decisions. See how new hires affect EBITDA margin. Run scenarios for slower revenue growth. No spreadsheets required.
Connect your metrics to headcount, expenses, and revenue. Use Runway's financial modeling platform to test business assumptions and see the impact instantly.
Frequently Asked Questions
Should we highlight EBIT or EBITDA to investors?
Let your cost structure decide. Lead with EBIT if depreciation and amortization make up a large, recurring part of your economics. This approach offers the truest picture of earnings for hardware or capital-intensive operations.
Stick with EBITDA if you run an asset-light business like a SaaS or marketplace platform. Since depreciation and amortization remain low, this metric tells a better story. Pair it with cash metrics to keep your cash generation figures accurate.
Why doesn't EBITDA equal cash flow from operations?
EBITDA leaves out a lot. It skips working capital changes, capital expenditures, interest payments, and taxes. When your receivables grow, payables shift, deferred revenue moves, or you spend on equipment and pay down debt, your cash position changes, even if EBITDA stays flat.
That's why cash can move very differently from EBITDA quarter to quarter.
Is stock-based compensation a valid "adjustment"?
You can show Adjusted EBITDA that excludes SBC, but also present the GAAP number alongside it. SBC is economically dilutive: it affects shareholder ownership, so most investors want to see both versions.
If you're excluding it, explain why and stay consistent period-to-period. Transparency matters more than the specific treatment.
Our margins bounce around. How do we make them decision-useful?
Start with trailing averages: three-month or twelve-month smooths out the noise. Tag known seasonal items so readers understand what's predictable. Separate one-time costs from your run-rate expenses.
Keep your expense classification stable. If hosting lives in COGS one quarter and OpEx the next, movements reflect accounting changes, not operational reality. Lock in your categories so margin shifts tell the real story.
Benchmark better. Decide faster.
EBIT, EBITDA, and their margins show how efficiently your business operates. Use them to make smarter decisions, benchmark against competitors, and give your team and investors a clear view of your financial performance.
Tracking these metrics manually doesn't scale. Runway automates the math. Build your P&L once, and your metrics update automatically as fresh data comes in. Track adjusted versions, model different scenarios, and share real-time updates, all without touching a spreadsheet.
Ready to forecast smarter? Book a demo.