EBITDA is defined as a company’s earnings before interest, taxes, depreciation, and amortization. Although you likely have heard the term before, few people outside the executive suite (other than accountants) really know what it means. It’s widely used as a measurement of a company’s current operating profitability.
But as a company moves to the cloud, your EBITDA numbers could look worse. That’s because EBITDA isn’t adjusted for operating expenses like cloud services — but is adjusted for the depreciation of capital expenses, which decreases under the use of the cloud.
The cloud’s effect on EBITDA will matter greatly to publicly traded companies, where senior executives’ bonuses and stock grants are determined by EBITDA performance. In some cases, 50 to 75 percent of their total compensation is affected.