Business & finance · also called Earnings before interest, taxes, depreciation and amortisation
EBITDA
EBITDA is a company's earnings before interest, tax, depreciation and amortisation, used as a rough measure of operating profit.
EBITDA strips out financing costs, tax and non-cash accounting charges to show roughly what the operations themselves earn. It is the figure most often used to compare and value companies, including the listed businesses in and around search arbitrage, which usually report an "adjusted" version.
In this industry it must be read with two cautions. First, headline revenue is misleading. An arbitrageur's gross revenue is mostly passed straight to traffic sources as TAC. EBITDA should be compared with Revenue ex-TAC, not gross revenue, to see the true margin.
Second, EBITDA is not cash. It is calculated on revenue as booked, while cash arrives on net payment terms and may be reduced by a clawback. A company can report healthy EBITDA and still run short of money, especially when growing.
Buyers of arbitrage businesses also discount earnings for fragility. Profit that depends on one feed contract or one traffic source (concentration risk, platform risk) is worth a lower multiple than the same profit from durable, diversified sources. "Adjusted" figures deserve a look at what was adjusted out.
An example
Illustrative: gross revenue $10m, TAC $7.5m, so revenue ex-TAC is $2.5m. Staff, tools and overheads cost $1.5m. EBITDA is $1m: 10% of gross revenue but 40% of revenue ex-TAC.
Related terms
Revenue ex-TAC
Revenue ex-TAC is revenue after subtracting traffic acquisition cost: what the business keeps once the traffic that produced the revenue has been paid for.
Gross revenue
Gross revenue is total revenue before the costs of earning it are subtracted; where in the chain it is measured changes what the number means.
TAC (traffic acquisition cost)
TAC is the money a company pays to others to obtain traffic, whether a search engine paying its partners or an arbitrageur paying for ads.
Net revenue (ex-TAC)
Net revenue is revenue left after subtracting the cost of buying the traffic that produced it, also called revenue ex-TAC.
Profit margin
Profit margin is profit as a percentage of revenue: the share of each dollar earned that is left after costs.
Concentration risk
Concentration risk is the danger of depending too heavily on one feed, one traffic source, one keyword group or one account, so a single failure hurts the whole business.