EBITDA strips four items out of net income — interest, taxes, depreciation, and amortization — to land on a number that approximates operating cash before financing choices, jurisdiction, and historical capex distort the picture. Interest reflects the debt-vs-equity mix; taxes reflect the entity and where it pays; depreciation and amortization reflect past capex schedules and acquired-intangible accounting. Stripping them produces something closer to the operating engine.
The calculation runs two ways and lands in the same place. Bottom-up: EBITDA = net income + interest + taxes + depreciation + amortization. Top-down: EBITDA = revenue - COGS - operating expenses (excluding D&A). EBITDA margin is EBITDA divided by revenue, the percentage form used for cross-brand comparison.
For DTC, EBITDA is the bridge metric between operator vocabulary (contribution margin, CAC payback, cohort LTV) and finance vocabulary. When a brand approaches a credit facility, an acquirer, or a board reviewing the annual plan, EBITDA is the number on the page.
The gap that operators discover late is between EBITDA and contribution margin. Contribution margin subtracts only variable costs; EBITDA also subtracts fixed operating costs — salaries, rent, software, brand spend, agency fees. A brand with 35% contribution margin and 12% EBITDA margin is healthy. A brand with 35% contribution margin and negative EBITDA is funding overhead from outside capital.
Charlie Munger has called EBITDA “bullshit earnings,” and the critique has teeth: EBITDA ignores capex, working-capital investment, and stock-based compensation, and it overstates cash generation for capital-heavy businesses. DTC capex is usually modest, so the gap reads cleaner than for industrial businesses — but free cash flow is the better metric when actual capital allocation is on the table.