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Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a financial metric that can help you understand your company’s cash flow from its core activities.
EBITDA strips away non-cash and potentially subjective financial metrics. For example, your interest, taxes, depreciation, and amortization can depend on your financing and accounting decisions. But competitors or an acquirer might take a different approach, which could change these numbers.
By focusing on EBITDA, investors can better understand how much cash your company can generate each year. Software as a service (SaaS) companies are also sometimes evaluated using the Rule of 40, which takes the growth versus profitability trade-off into account. If your EBITDA margin (EBITDA / Revenue) plus revenue growth is higher than 40, your company could be an attractive acquisition target.
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