EBITDA Growth: What Is It, Calculation, Importance & More

EBITDA Growth measures the rate at which a company’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) increases over time. This financial metric provides insights into a company’s operational performance, excluding the effects of financing and accounting decisions. By focusing solely on core profitability, EBITDA Growth offers a clear picture of how well a company scales its operations.

For example, if a company’s EBITDA was $1 million last year and $1.2 million this year, its EBITDA Growth is 20%. This metric is particularly useful in comparing companies within the same industry, as it excludes variables like tax rates and capital structures.

The formula to calculate EBITDA Growth is straightforward:

EBITDA Growth (%) = (Current EBITDA − Previous EBITDA) / Previous EBITDA × 100

This calculation highlights the percentage change in EBITDA over a specific period.

• Current EBITDA: It refers to the EBITDA for the current period (usually a quarter or year). 
• Previous EBITDA: This is the EBITDA figure for the same period in the previous year or quarter. It is used as the baseline to compare the current period’s performance.
• Numerator: The difference shows how much the company’s earnings have changed from one period to another, capturing the change in operational performance.
• Division by Previous EBITDA: This step normalizes the change, converting it into a proportion relative to the earlier period’s performance.

This final result is the percentage change in EBITDA, which shows how much the company’s operational earnings have grown or contracted over the period in question.

Let’s assume that a company, ABC Inc., reports its EBITDA for two consecutive years. The data for the company is as follows:

• Previous Year EBITDA (Year 1): $4,000,000
• Current Year EBITDA (Year 2): $5,200,000

Identifying the Current and Previous EBITDA

• Current EBITDA: $5,200,000
• Previous EBITDA: $4,000,000

These figures represent the company’s EBITDA for Year 2 and Year 1, respectively.

To find the absolute change in EBITDA between the two years, subtract the Previous EBITDA from the Current EBITDA:

Difference = Current EBITDA − Previous EBITDA

Difference = 5,200,000 − 4,000,000 = 1,200,000

So, the company’s EBITDA has increased by $1,200,000 from Year 1 to Year 2.

Next, divide the difference by the Previous EBITDA to determine the growth relative to the Previous EBITDA:

EBITDA Growth = Difference​ / Previous EBITDA

EBITDA Growth = 1,200,000​ / 4,000,000 = 0.30

EBITDA Growth (%) = 0.30 × 100 = 30%

The EBITDA Growth for ABC Inc. from Year 1 to Year 2 is 30%. This means the company increased its operational earnings by 30% over the year.

EBITDA Growth is a vital financial metric for evaluating a company’s operational success and potential for long-term growth. By focusing on core profitability, this measure eliminates external factors, offering a clear perspective on performance. Below are the key reasons why EBITDA Growth is important:

EBITDA Growth isolates a company’s operational performance by excluding external factors like interest and taxes. It shows how well a company is improving its profitability through core business activities, signaling its capacity for sustainable growth.

Investors use EBITDA Growth as a key indicator of financial health. A consistent upward trend reassures investors about the company’s ability to generate profits, making it a more attractive investment compared to peers with stagnant or negative growth.

EBITDA Growth reflects how effectively a company manages its expenses and scales operations. Growing EBITDA suggests efficient cost control and better revenue generation, indicating that the company is operating effectively and can expand without increasing inefficiencies.

By removing variables like depreciation, taxes, and interest, EBITDA Growth focuses purely on a company’s operational ability. This clean view allows for better comparison between businesses, as it eliminates external influences that could distort profitability analysis.

EBITDA Growth plays a crucial role in valuation models, especially when comparing a company’s enterprise value (EV) to its EBITDA. A higher growth rate can elevate a company’s valuation, signaling strong future profitability and helping attract investors.

EBITDA Growth is an essential financial metric that provides insights into a company’s operational performance over time. By examining the rate of change in EBITDA, investors and analysts can assess whether a company is becoming more profitable, efficient, or sustainable. Below is how to interpret EBITDA Growth, whether high, low, or negative:

• Strong Financial Health: High EBITDA growth reflects improved profitability and operational efficiency, signaling successful core business performance.
• Investor Appeal: High EBITDA growth indicates strong cash flow, making the company more attractive to investors for potential returns.
• Operational Efficiency: Consistent EBITDA growth shows effective cost management and economies of scale, improving overall business efficiency.
• Opportunities for Expansion: Strong EBITDA growth provides financial flexibility, enabling reinvestment in the business and potential for future growth.

• Consistent, But Not Exceptional: Moderate EBITDA growth shows steady performance, signaling operational improvements and business stability without explosive growth.
• Potential for Improvement: Stable growth suggests room for optimization in cost management, revenue generation, or market expansion.
• Investor Confidence: Investors may remain confident but expect more aggressive strategies to boost profitability, especially in competitive sectors.

• Declining Profitability: Low or negative EBITDA growth signals reduced profitability, possibly due to rising costs, inefficiencies, or declining demand.
• Potential Cash Flow Issues: Negative EBITDA growth may indicate challenges in generating sufficient cash flow, affecting obligations and future investments.
• Management Concerns: Persistent negative growth may prompt a need for strategy reassessment, cost reductions, or innovation to restore profitability.
• Investor Caution: Negative EBITDA growth may cause investors to become cautious, leading to lower stock prices and difficulty attracting investment.

What qualifies as “good” EBITDA Growth varies by industry and company maturity:

• Mature Companies: A steady growth rate of 5–10% is typically considered healthy.
• High-Growth Companies: Startups or companies in expanding industries may aim for 20% or higher.

Investors should also consider other factors like market conditions, industry competition, and the company’s overall financial strategy when evaluating EBITDA Growth.

While EBITDA growth is a valuable metric for assessing profitability, it has several limitations that can provide an incomplete picture of a company’s financial health. Here are five key limitations:

EBITDA growth does not account for capital expenditures, which are necessary for business expansion or maintenance, potentially overstating profitability without considering these critical investments.

By ignoring interest, taxes, depreciation, and amortization, EBITDA growth overlooks significant financial obligations that can affect a company’s actual profitability and cash flow.

EBITDA growth measures operational earnings but doesn’t reflect actual cash flow, which is crucial for determining a company’s ability to meet obligations and fund growth.

Companies may use different accounting methods, affecting the accuracy and comparability of EBITDA growth. This makes cross-company or cross-industry comparisons less reliable.

For highly leveraged companies, EBITDA growth may mask financial distress by not considering interest expenses, which can significantly impact cash flow and long-term sustainability.

InvestingPro offers detailed insights into companies’ EBITDA Growth including sector benchmarks and competitor analysis.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company’s profitability from core operations.

While revenue growth reflects changes in total income, EBITDA Growth focuses on operational profitability, excluding non-core factors like taxes or financing costs.

Yes, negative EBITDA Growth indicates a decline in operational profitability, which could result from increased costs or reduced revenue.

EBITDA Growth is a key metric for valuing companies, as it highlights their ability to scale operations and generate cash flow.

Investors typically review EBITDA Growth quarterly or annually to assess performance trends over time.