The EBITDA ratio varies by industry, but as a general guideline, an EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.
What is a good EBITDA? A "good" EBITDA varies depending on the industry sector and the company's size, but generally, a higher EBITDA indicates strong operational efficiency and profitability. In many industries, an EBITDA margin between 10% and 20% is considered solid, with anything above 20% seen as exceptional.
The average EBITDA margin of more than 300 software (systems and applications) companies in the U.S at the start of 2023 was 29%. If your startup has an EBITDA margin of 30% or higher, you're tracking to SaaS industry averages and doing great.
In some industries, a higher EBITDA margin above 15% or more, may be considered favorable. A good EBITDA varies by industry, company size, industry norms, growth stage, and capital structure.
The other way round: the first million euros in interest is deductible, but after that the amount of deductible interest may not exceed 20% of the profit (more accurately: 20% of the fiscal EBITDA).
The longer answer is that a good EBITDA margin is at least 10%. A higher EBITDA margin suggests a company has lower operating costs than its revenue. Meanwhile, a lower margin signifies poor cash flow.
The Rule of 40 states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.
The Interest Limitation Rule (ILR) is intended to limit base erosion using excessive interest deductions. It limits the maximum net interest deduction to 30% of Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA). Any interest above that amount is not deductible in the current year.
A good EBITDA margin may fall between 15% and 25%, says Simon Thomas, Managing Director of accountancy firm Ridgefield Consulting. Generally, the higher the EBITDA margin, the greater the profitability and efficiency of a company.
EBITDA indicates a company's ability to consistently profit, while net income indicates a company's total earnings. Net income is generally used to identify the value of earnings for every share of the business. It can be calculated using the following formula.
Generally speaking, a good EBITDA margin for manufacturing businesses falls between 5% and 10%. However, this will vary depending on the specific industry you are manufacturing your products for, and how capital-intensive your operations are.
Most mid-sized businesses are acquired by other companies. EBITDA removes an owner's salary from the valuation because the buyer will need to spend this figure on a new manager or CEO.
A “good” EBITDA margin is industry-specific, however, an EBITDA margin in excess of 10% is perceived positively by most.
The “Rule of 40” in SaaS valuations is a rule of thumb used to assess a company's financial health and growth potential. It suggests that the sum of a company's top line year over year growth rate (annual recurring revenue growth percentage) and its EBITDA margin should ideally be at least 40%.
Generally, net debt-to-EBITDA ratios of less than 3 are considered acceptable. The lower the ratio, the higher the probability of the firm successfully paying and refinancing its debt. With the lower probability of a company defaulting, the company's credit rating is likely better than the industry average.
By accounting for a company's debt and cash position, it provides a clearer picture of a firm's true value and operational efficiency. While a ratio below 10 is often considered attractive, investors must remember that "healthy" EV/EBITDA levels vary significantly across industries and market conditions.
Generally, a healthy EBITDA for a mid-size home services company is between 10% and 15% of their total revenue. This means that the company is generating more in revenue than it is spending on costs and expenses.
Warren Buffett's Criticism Of EBITDA
He criticizes the use of this metric as the only indicator of a company's financial health and success. The essential component of maintaining and expanding a business, capital expenditures are not taken into account by EBITDA.
The rule of thumb for growth rate expectations at a successful SaaS company being managed for aggressive growth is 3, 3, 2, 2, 2: starting from a material baseline (e.g., over $1 million in annual recurring revenue [ARR]), the business needs to triple annual revenues for two consecutive years and then double them for ...
A healthy EV/EBITDA ratio for a company is less than 10. It can also indicate that a stock may be undervalued. The average EV/EBITDA ratio for the S&P 500 as of January 2020 is 14.20.
By ignoring depreciation, Ebitda fails to account for the ongoing capital requirements necessary to replace aging assets. As a result, investors may underestimate the future capital needs of the company, leading to underinvestment and potential operational challenges down the line.
A too-high EBITDA could translate to a very high sales price that makes your business unattractive or uncompetitive. This could price you out of the market and make other dealerships, with their lower EBITDAs and lower sales prices, look like better values as acquisitions.
A good EBITDA growth rate varies by industry, but a 60% growth rate in most industries would be a good sign.