Picture this: You’re in a meeting with SaaS founders and investors, and someone proudly proclaims, “We’re finally EBITDA positive!” The room erupts in nods and smiles. EBITDA – that famous Earnings Before Interest, Taxes, Depreciation, and Amortization metric – is like the business world’s favorite celebrity. Companies flaunt it in earnings reports, bankers use it in loan covenants, and CFOs drop it into conversation like it’s a magic password. But here’s the twist: while EBITDA can be a useful yardstick in many industries, for SaaS companies it can be more misleading than enlightening. Let’s dive into why everyone is obsessed with EBITDA, what it does do well, and why in the high-growth SaaS arena it often misses the mark.
Why Everyone Talks About EBITDA
The business world’s love affair with EBITDA is no accident. There are some good reasons this metric became so popular:
- Apples-to-Apples Comparisons: EBITDA was originally invented to level the playing field when comparing companies . By stripping out interest (debt costs), taxes, and non-cash charges like depreciation and amortization, EBITDA focuses on core operating performance. This helps investors compare profitability across companies withoutgetting distracted by different capital structures or tax environments . In other words, it’s a quick way to see how the business itself is doing before loans and lawyers get involved.
- Clarity on Operations: Because it removes a lot of accounting “noise,” EBITDA can highlight the underlying earning power of the business. It’s essentially telling you, “If we ignore financing and accounting quirks, can this company make money?” A healthy, steady (or growing) EBITDA is often taken as a sign of good operational efficiency . For many traditional businesses, current earnings can serve as a proxy for future cash flow, so EBITDA is an easy stand-in for performance .
- Investor & Lender Friendly: Bankers and private equity folks adore EBITDA. Lenders look at EBITDA to gauge if a company can cover its debt payments – it’s used in debt covenants and credit analyses as a measure of cash available for interest . Investors often use EBITDA-based multiples to value companies (think EV/EBITDA multiples in M&A deals) because it’s a standard, well-understood benchmark. In fact, EBITDA is “an oft-used measure of the value of a business” and many consider it a “crucial” metric in financial analysis for its simplicity and focus on core earnings.
Put simply, EBITDA became the go-to metric because it’s convenient and standardized. It smooths out a lot of differences between businesses. A manufacturing company with heavy equipment and a software company with mostly salaries can be compared on a more equal footing by looking at EBITDA, since it ignores the factory’s depreciation and just asks, “How much profit before those extras?” And for better or worse, many in the business world equate EBITDA with a measure of cash earning ability – hence the obsession.
The Good: Advantages of Using EBITDA (Generally)
Before we dunk on EBITDA for SaaS, let’s acknowledge its upsides in general business contexts:
- Easy Benchmarking: It’s a common KPI that almost every company tracks, so it provides a common language. You can stack up companies side by side on EBITDA margins and get a rough sense of who’s more efficient . For example, if one company has an EBITDA margin of 25% and another 15%, you can infer that the first keeps more of each revenue dollar as operating profit (before those ITDA items).
- Ignores Non-Operational Noise: EBITDA lets you focus on operations. By excluding interest and taxes, it doesn’t “penalize” a well-run company just because it has debt or is in a high-tax jurisdiction. By excluding depreciation and amortization, it avoids distortions from different accounting life spans of assets. This can be especially useful in asset-heavy industries – e.g. telecom or manufacturing – where huge depreciation charges might make net income look paltry even if operationally the business is sound.
- Proxy for Cash Flow (with a Big Asterisk): In theory, EBITDA is a rough proxy for operating cash generated, since it starts with earnings and adds back non-cash charges . For stable, mature companies, EBITDA and actual cash flow can be somewhat in the same ballpark. This makes EBITDA handy for quick valuations – many buyers use EBITDA to estimate how much cash the company could throw off to pay debt or invest in growth . It was originally used as a shortcut to see if a business could pay off long-term assets debt from its earnings.
- Widely Accepted by Investors: Simply put, everyone knows what EBITDA is. Boards talk about it, analysts publish it, and the market often expects to see it. If you report your EBITDA improving, you’ll likely get a pat on the back from someone. It’s considered a sign of “financial health” in a lot of circles (though, as we’ll see, that can be an illusion).
These advantages mean EBITDA isn’t inherently a bad metric – it has its place. For many traditional businesses or later-stage companies, tracking EBITDA can indeed highlight improvements in cost management or operating leverage. It’s one tool in the toolbox. However, it’s far from the whole story – especially for SaaS.
EBITDA’s Blind Spot: Why It Falls Short for SaaS
Now for the juicy part: Why EBITDA is not a great metric for SaaS companies. In a SaaS business (particularly high-growth SaaS), focusing on EBITDA can be like using a map that doesn’t show all the hidden roads and pitfalls. Here’s why EBITDA often misses critical realities in the SaaS model:
1. Ignoring the Cost of Growth (CAC & R&D)
SaaS companies live and die by growth – acquiring customers and building product. These aren’t optional expenses; they’re the lifeblood of the business. Yet EBITDA treats customer acquisition costs (CAC) and research & development (R&D) as just regular operating expenses to be minimized. For a young SaaS, that’s misleading.
- Customer Acquisition Costs: In SaaS, you often spend a lot upfront to acquire a customer (sales & marketing, onboarding costs) and recoup that investment over time via recurring subscription revenue. EBITDA in the early years will look ugly – because you’re expensing all those CAC today, while the revenue from those customers trickles in monthly over future periods. A strict EBITDA focus might discourage this investment in growth. You could have a fantastic LTV:CAC ratio (meaning every dollar spent on acquisition will return multiple dollars in lifetime value) but still have negative EBITDA this year because the payoff comes later. Simply put, EBITDA doesn’t care that your marketing spend is fueling future ARR; it only sees that expense hurting earnings now.
- R&D and Product Development: Similarly, SaaS businesses pour money into developing the product and new features. If you expense all R&D, EBITDA shows lower earnings. Some companies might even capitalize certain development costs (turning them into an asset on the balance sheet to amortize later). But if they do, the amortization of that software gets added back in EBITDA (because amortization is the “A” in EBITDA) – effectively making those R&D costs vanish from the EBITDA metric ! This accounting magic means a SaaS company could spend millions on building a platform but still report a higher EBITDA, as if those costs don’t exist. That’s dangerous – it paints an overly rosy picture of profitability by ignoring the very investments that make the business viable. One SaaS finance expert noted that if a business is capitalizing software development, those cash outlays won’t hit EBITDA at all, creating a disconnect between EBITDA and reality.
In short, EBITDA doesn’t distinguish between “good” expenses (growth investments) and “bad” expenses (wasteful spending). It just lumps them together. A SaaS company aggressively investing in customer acquisition and innovation might have awful EBITDA but fantastic prospects – yet EBITDA won’t give it credit for future payoffs. Conversely, a SaaS that slashes marketing and R&D will see EBITDA improve in the short term, even as its future growth potential is crippled. That’s a pretty big blind spot.
2. Deferred Revenue: EBITDA Misses the Subscription Timing
SaaS operates on subscriptions, which means deferred revenue is a major factor. When a SaaS company collects annual up-front payments for a software service, accounting rules say you recognize that revenue over time (each month as the service is delivered). The cash comes in Day 1, but the revenue shows up gradually on the P&L – and EBITDA is based on that accounting revenue.
This creates a timing quirk:
- If a SaaS is growing fast and selling annual contracts, it will have a lot of cash upfront (deferred revenue liabilities on the balance sheet) that aren’t yet in revenue. EBITDA doesn’t reflect that cash influx, because EBITDA only sees recognized revenue minus expenses. Some SaaS companies even report an adjusted metric adding deferred revenue growth to EBITDA to highlight the cash coming in . But a standard EBITDA figure ignores it.
- Paradoxically, if growth slows down, deferred revenue can make the P&L (and EBITDA) look better than the cash reality. Why? Suppose last year you signed a bunch of annual deals (got cash then, recorded deferred revenue). This year, even with slower sales, you’re still recognizing that previously deferred revenue, so your EBITDA might hold steady (since revenue is still coming from last year’s deals, and you may have cut back expenses). Meanwhile, your cash flow could tank because new bookings (and their upfront cash) dried up. As SaaS Capital put it, a company that looked “cash flow positive” thanks to upfront payments can quickly start burning cash even while its P&L improves if growth slows . In other words, EBITDA can lull you into complacency – the financials look smooth, but the underlying cash engine is sputtering.
So, EBITDA doesn’t adequately consider the working capital dynamics of SaaS. It won’t tell you if your operating cash is being propped up by billing practices or if a cash crunch is looming when growth plateaus. For SaaS, cash is king(recurring revenue businesses can fail if they run out of cash, even with good EBITDA). One extreme cautionary note from SaaS experts: with enough deferred revenue and aggressive cost capitalization, “an increasingly net income profitable SaaS company can run out of cash and go bankrupt!” . That’s a scary disconnect – and pure EBITDA won’t flag it.
3. High Growth, High Burn: EBITDA Can Be Misleading
The SaaS industry is known for high-growth, high-burn strategies – land-grab market share now, reap profits later. In such cases, EBITDA often paints a weird picture:
- Many SaaS startups have negative EBITDA for years, by design. They’re plowing every dollar (and then some) back into growth. A naive observer might say “This business is losing money, EBITDA is negative – not good!” But in SaaS, we often expect that early on. Investors may even prefer a company invest aggressively and have negative EBITDA if it’s acquiring customers efficiently and building a sticky recurring base. Focusing on EBITDA too soon can be counterproductive. Some of the most successful SaaS firms had significant EBITDA losses while they honed their product and scaled revenue.
- EBITDA can make unprofitable firms look healthier than they really are. This was seen in the dot-com era, where companies with no profits touted positive EBITDA to appear attractive . By ignoring huge expenses (often “one-time” or “extraordinary” costs, which somehow happened every quarter), EBITDA allowed wishful thinking. As Investopedia recounts, taking out ITDA “can make completely unprofitable firms appear to be fiscally healthy” – many dot-coms with no real earnings became darlings of the investment world by pointing to EBITDA . Sound familiar? SaaS companies in the 2010s and 2020s have similarly used adjusted EBITDA to claim profitability while burning cash (Uber and WeWork famously introduced their own flavor of “adjusted EBITDA” to recast their hefty losses in a better light). In a high-burn model, EBITDA can be massaged with add-backs and exclusions until you get a positive number that masks the true risk.
- Confusing EBITDA with Cash Flow: Perhaps the biggest criticism is that people mistakenly equate the two. A SaaS CEO might cheer “We’re EBITDA breakeven, so we’re not burning cash anymore!” – which might be totally false. EBITDA leaves out real cash outflows like interest on debt and tax payments. It also leaves out capital expenditures (like buying equipment or capitalizing software costs). For many companies, interest and taxes are not trivial – they do require cash . And even “non-cash” depreciation is usually a proxy for needing to invest in assets. In SaaS, capital expenditures might be lower than in manufacturing, but if you’re capitalizing things (like software or commission costs to obtain contracts), you are spending cash – it just isn’t hitting the income statement now. So a SaaS business could be EBITDA-positive yet still see its bank account dwindling. As one finance blogger wryly noted, “they told us they reached cash-flow break even because they are EBITDA positive. Well, not really.” If you’re not watching actual cash flow, EBITDA can lull you into a false sense of security.
The bottom line: EBITDA can be a mirage for SaaS. In a high-growth context, it might not correlate with the company’s health or trajectory at all. It might even incentivize the wrong decisions (cutting good spend to improve a metric, or ignoring looming cash shortfalls). So, while EBITDA obsession is fine for a stable widget manufacturer, in SaaS it could lead you dangerously astray.
Metrics that Matter More for SaaS
If EBITDA isn’t the star of the show for SaaS, what is? SaaS founders and investors increasingly turn to alternative metrics that provide a clearer picture of a subscription business’s health and potential. Here are a few that often overshadow EBITDA in importance:
- Gross Margin: Gross margin is the true indicator of a SaaS product’s profitability. It tells you how efficiently you deliver your service. High gross margins (70%+) are typical in healthy SaaS companies , indicating that once you acquire and serve a customer, most of that revenue is available to cover other costs (and eventually profit). Gross margin essentially sets the ceiling for your profitability – if your gross margin is weak (say 50%), even zero sales & marketing spend later would only yield 50% profit at best. Investors scrutinize SaaS gross margins to ensure the business model is sound. It’s a forward-looking sign: a SaaS with strong gross margins but negative EBITDA today could become hugely profitable at scale, whereas one with slim gross margins might never achieve great profits even if EBITDA is breakeven now. In short, gross margin in SaaS is king for understanding the unit economics.
- Net Revenue Retention (NRR): NRR (also called net dollar retention) measures how your existing customer base’s revenue changes over time, factoring in upgrades, downgrades, and churn. It answers, “If we stopped acquiring new customers, would our revenue grow or shrink?” An NRR above 100% means you’re expanding revenue within your customer base – a fantastic sign of a loved product and strong pricing power. For SaaS companies, NRR is often a better gauge of health than any profit metric. If you have high NRR (say 120%), you can grow without even adding new customers . It signals customer success and product-market fit. Conversely, a low NRR (below 100%) means leaks in the bucket – something EBITDA won’t reveal. You could have positive EBITDA one year by cutting costs, but if your customers are churning, the business is in trouble. NRR concisely describes a company’s trajectory with current customers , which is vital in subscription models.
- Free Cash Flow (FCF): Cash is the oxygen of any business, especially SaaS companies that often run at operational losses initially. Free cash flow measures how much cash the business actually generates (or consumes) once you’ve paid all your expenses and necessary capital investments. Unlike EBITDA, free cash flow accounts for working capital changes (e.g. that deferred revenue effect, or needing to fund accounts receivable) and capital expenditures. It’s therefore a reality check. Many SaaS investors ultimately care about the path to positive free cash flow – because it means the company can sustain itself without endless new financing. FCF is also used in the famous “Rule of 40” (growth % + profit % should be ≥ 40 for a healthy SaaS), where the profit can be measured by an operating margin or free cash flow margin. FCF tells you if those EBITDA “profits” are actually translating into money in the bank or if they’re an accounting mirage. As Investopedia bluntly puts it, operating cash flow (a component of FCF) is a better measure of cash generation than EBITDA because it includes changes in working capital . In high-growth SaaS, monitoring cash burn and runway is critical – far more than hitting an EBITDA target in the short term.
- Other SaaS-Specific Metrics: Beyond the big three above, SaaS companies look at metrics like ARR (Annual Recurring Revenue) growth, CAC payback period, LTV:CAC ratio, gross churn, and burn multiple, among others. These metrics speak directly to the mechanics of the SaaS model – how efficiently are we acquiring revenue, how long do customers stick around, and what is our growth efficiency? For example, ARR growth combined with gross margin shows how quickly you’re scaling a profitable revenue base, and burn multiple (cash burned relative to new ARR added) shows how efficiently you’re converting investments into growth. While EBITDA focuses on current period profitability, these SaaS metrics focus on lifetime value, retention, and growth efficiency, which are often better indicators of long-term success in the subscription world.
Balanced View: Is EBITDA Ever Useful for SaaS?
So, should SaaS companies throw EBITDA in the trash bin? Not entirely. It’s about context and timing:
EBITDA does become more relevant as a SaaS company matures. Once you’ve achieved a good scale (say, well north of startup stage, e.g. $50M ARR and growing at a steadier pace), showing that you can expand margins and generate positive EBITDA is important. It signals the business is shifting from growth-at-all-costs to sustainable growth. In later stages or for public SaaS companies, investors will expect to see a path to profitability and cash flow. In those scenarios, improving EBITDA margins demonstrate operating leverage – the idea that costs are growing slower than revenue, thus profits emerge. In fact, some successful SaaS firms eventually run with healthy EBITDA margins after years of reinvestment. At that point, EBITDA can be one benchmark of efficiency (alongside others like free cash flow margin).
Furthermore, lenders to SaaS businesses might still look at EBITDA (or a variant of it) to assess creditworthiness once the company is out of the hyper-growth phase. And if a SaaS company has a large services component or one-time revenues, they might value that part of the business on EBITDA while valuing the recurring part on ARR. There are nuances where EBITDA isn’t completely irrelevant.
However, for most SaaS startups and scale-ups in their high-growth journey, EBITDA should not be the primary North Star. Chasing EBITDA too early can be dangerous – it might lead you to starve growth initiatives to “make the numbers look good.” Seasoned SaaS investors often expect negative EBITDA and are fine with it as long as the unit economics and growth metrics are stellar . As one finance site noted, if you’re still burning cash, using EBITDA to predict future performance is a poor basis . In other words, EBITDA-positive does not automatically equal “healthy” in SaaS, nor does EBITDA-negative equal “trouble” – you have to dig deeper.
Final Thoughts: EBITDA – Handle with Care in SaaS
EBITDA is like that old tool that works great for some jobs but is ill-suited for others. It has proven useful in traditional businesses and remains a staple in financial discussions, but in the context of SaaS, it can be downright misleading. The obsession with EBITDA in the broader business world isn’t going away overnight – it does serve its purpose as a quick, standardized profitability check. Yet, as a SaaS founder or investor, you need to look beyond EBITDA’s shiny veneer.
A high-growth SaaS company is a different beast: it values recurring revenue over immediate profits, it spends today for gains tomorrow, and it manages a subscription model with unique cash flow timings. Metrics like gross margin, net revenue retention, and free cash flow illuminate these dynamics far better than EBITDA can. They tell the story of customer happiness, product economics, and sustainable growth – the real drivers of long-term value in SaaS.
So the next time someone excitedly brings up EBITDA in a SaaS board meeting, feel free to discuss it – but keep it in perspective. Celebrate improving EBITDA when it comes as a result of smart growth and efficiency, but don’t chase it blindly. Ask the deeper questions: How sticky is our revenue? Are we earning back our customer acquisition costs? Do we have the cash to sustain our plans? Those answers will matter far more to your success than a single earnings metric stripped of context.
In the end, EBITDA is just one piece of the puzzle – and for SaaS, it’s a corner piece from the wrong puzzle box.Use it, note it, but don’t be fooled by it. Focus on the metrics that truly capture your company’s health, and you’ll have a clearer view of where your SaaS business is headed – EBITDA or not.
What do you think? Does EBITDA matter in SaaS? Let’s discuss!
Sources:
? Investopedia – Challenging the EBITDA Metric (critique of EBITDA’s misuse and comparison with cash flow) - Link 1 | Link 2
? SaaS Capital – EBITDA Equals Operating Cash Flow and Other Lies (why EBITDA ≠ cash flow in SaaS, impact of capitalizing costs & deferred revenue) - Link 1 | Link 2
? Driven Insights – ARR vs EBITDA for SaaS Valuation (discussion on when to use ARR vs. EBITDA in SaaS valuation) - Link 1 | Link 2
? Peak Frameworks – Why Do We Use EBITDA? (overview of EBITDA advantages and disadvantages) - Link 1 | Link 2
? Drivetrain AI – SaaS Gross Margin Guide (emphasizing gross margin importance and benchmarks ~75% in SaaS) - Link 1 | Link 2
? Drivetrain AI – Net Revenue Retention (NRR) explainer (NRR as a critical metric indicating growth from existing customers) - Link 1 | Link 2
#SaaS #Finance #EBITDA #StartupMetrics #Growth
