What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Wall Street analysts, private equity firms, and acquirers use EBITDA as a proxy for the raw operational profitability of a business — stripping out financing decisions (interest), government obligations (taxes), and accounting conventions (depreciation and amortization) to see how much cash the core business generates.
- Formula:
Revenue − Operating Expenses (OpEx) = EBITDA - Why it matters: Companies are often valued as a multiple of EBITDA (e.g., "10x EBITDA"). A $2M drop in EBITDA can reduce your company's valuation by $20M.
Why Cloud Hurts EBITDA
Notice what is excluded from the EBITDA calculation: Depreciation and Amortization. This is the trap.
Scenario A — On-Premises (CapEx):
You buy $1M of servers. This is CapEx. It goes on the balance sheet. The annual depreciation expense ($200K/year over 5 years) sits below the EBITDA line — it is added back when calculating EBITDA. Your EBITDA is barely affected.
Scenario B — Cloud (OpEx):
You pay $1M to AWS. This is OpEx. It is subtracted directly from Revenue before EBITDA is calculated. Your EBITDA drops by $1M.
The Paradox: You might have the exact same cash in the bank in both scenarios, but Scenario B (Cloud) makes the company look dramatically less profitable to investors. This is why CFOs resist cloud migrations even when engineers correctly argue the cash cost is identical or lower.
A common senior engineering interview question is: "Why would a CFO oppose a cloud migration that saves money?" The answer is not about cash — it is about EBITDA. Cloud spend is OpEx and reduces EBITDA directly, while on-premises CapEx is depreciated and largely excluded from EBITDA. If the company is valued on an EBITDA multiple, a cloud migration can literally reduce the company's market valuation even if it saves cash. A strong answer also mentions that this is why FinOps teams pursue labor capitalization strategies to offset the EBITDA impact.