Arcvue
Finance—a number you will be asked to defend
EBITDA, and why everyone you borrow from cares about it.
The operating profitability metric that drives bank covenants, M&A valuations, and line-of-credit availability in GovCon. Five minutes, one number, and the three places it decides something for you. Arcvue computes it off the closed ledger, and every figure underneath it says where it came from.
Earnings before interest, taxes, depreciation, and amortization.
It measures operating profitability—how much cash the business generates from its core operations, before financing decisions and accounting adjustments have had their say.
Why not just use net income?
Because net income includes things that have nothing to do with how well the business operates.
| Item | Net income | EBITDA |
|---|---|---|
| Revenue and direct costs | Included | Included |
| Indirect costs—fringe, overhead, G&A | Included | Included |
| Interest on debt | Included | Excluded |
| Income taxes | Included | Excluded |
| Depreciation—equipment wear | Included | Excluded |
| Amortization—intangibles | Included | Excluded |
Basis the definition, as lenders and buyers apply it.
Two identical GovCon companies can report very different net income purely because one carries more debt, or made an acquisition and is amortizing the goodwill. EBITDA strips that out so the two can be compared at all.
Three things are decided by it, and none of them are yours to decide.
- Bank covenants are measured against it—debt to EBITDA, and the debt service coverage ratio.
- M&A valuations are quoted as multiples of it. “Seven times” means the purchase price is seven times annual EBITDA.
- Line-of-credit availability is usually tied to an EBITDA-based leverage ratio.
If EBITDA falls, your covenant ratios worsen without anything else changing. The bank can restrict borrowing, or call the loan, on a number you did not know had moved.
Not every cost that hits the P&L represents ongoing operations.
Which is why buyers and lenders look at Adjusted EBITDA—the normalized earning power of the business, after the one-offs are taken back out.
- One-time costs. Transaction fees, severance from a restructuring, legal settlements.
- Owner compensation above market. If the CEO takes 500,000.00 and the market rate is 300,000.00, an acquirer adds back 200,000.00.
- Non-recurring items. Moving costs, a system implementation, one-time bonuses.
Three GovCon nuances that change the number.
- Pass-through revenue. Large subcontract pass-throughs inflate revenue without generating margin. Some firms read EBITDA as a percentage of net revenue, excluding pass-throughs, for a truer picture.
- SCA wage increases. Government-mandated wage rises increase cost but are usually recoverable—they do not indicate deteriorating operations, and an unadjusted reading says they do.
- Digital asset reclassification. Where a company holds crypto assets, unrealized gains and losses are typically excluded from operating EBITDA.
Where the number shows up in the product.
- Dashboard—the EBITDA trend and its margin.
- Financial Statements—the P&L, with EBITDA as a line item.
- Debt & Refinancing—where EBITDA drives the covenant calculation.
- M&A—multiples applied to it for deal valuation.
- Scenario Planning—the what-if impact on it, before you commit.
Warren Buffett despises it. Everyone who lends to you uses it anyway.
The answer to that contradiction is comparability. You might own a debt-free business, collect receivables aggressively, sit at a low marginal tax rate, and lease rather than buy. Your neighbor might do the opposite on all four. Net income would say you are different companies. EBITDA asks the narrower question a lender actually needs answered: before any of those choices, how much does the operation itself produce?
It is a worse measure of a business than net income and a better measure of an operation, and the people setting your covenants are underwriting the operation.