3 Things You Should Know about EBITDA
To support JMP on our journey of separating from SAS, the Finance team has grown quickly over the past year. As an organization, we strive to share the “Why?” even if it sounds like complex Finance lingo.
In this new series "Financial Literacy 101", we aim to explain basic financial topics in a way that is beneficial to all.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is an indication of how a company generates cash flow from its operations. It is calculated from information on the income statement and in its truest form is a dollar amount which is often also expressed as a percentage of total revenue.
Since EBITDA is focused on operations, we need to remove the effect of non-operating and non-cash expenses. Interest and Taxes are considered non-operating expenses. This means they are incurred in the normal course of business and not a core part of operations. Depreciation and amortization are non-cash expenses that represent the cost of reducing the value of assets that provide benefits over time (i.e., buildings or intellectual property). Though accounting rules require all of these to be included on the income statement, they are variables that do not allow for easy comparability. For this reason, they are removed from earnings (net income) to normalize a company’s results and evaluate them more easily. Below is a visual example of how it is calculated.
This is an example and does not reflect JMP’s actual financial informationThis is an example and does not reflect JMP’s actual financial informationHow is EBITDA used?
EBITDA is a common metric used to evaluate the performance of a company and compare us to others and our own performance over time.
EBITDA is like contribution margin, a term you may recognize, with one key difference. Contribution margin does not add back depreciation and amortization expenses, thus resulting in a lower outcome than EBITDA.
For example, JMP is striving to be a Rule of 40 company that considers both revenue (TSR) growth and EBITDA. If contribution margin were used, instead of EBITDA, it would be harder to achieve this goal.
The Rule of 40 is an investor’s calculation for assessing the efficiency and growth of a privately held SaaS (software as a service) company. The definition of the Rule of 40 is that software companies are most efficiently run when the sum of their year-over-year growth rate percentage and their EBITDA percentage is at least 40%.
Why does this matter for JMP?
As Jon Weisz said during the JMP Kickoff, JMP needs to develop a culture of financial empowerment and understand how to ensure responsible growth. Our 2023 financial goals include being a Rule of 40 company by having >25% EBITDA percentage and 15% TSR growth. It is important to understand EBITDA and its impact on our goals.
Why should this matter to JMP staff?
Every employee has an impact on the financial health of JMP. From sales teams driving revenue growth to managers selecting vendors and approving costs to the efficiency with which we as employees get our jobs done. For non-sales employees, EBITDA will be a key component in the 2023 Performance Bonus Plan. More information on the plan will be communicated shortly.
Learn more about this topic using the following video as a useful resource:
What is EBITDA? EBITDA simplified (YouTube).
️TIMESTAMPS
- 00:00 - Intro
- 00:28 - Why is EBITDA popular?
- 01:08 - How to calculate EBITDA?
