From HoNwiki

Armor and magic armor are unit properties which reduce physical and magical damage taken, respectively. No armor type reduces true damage, and health loss from items or skills is not considered damage.

A hero's magic armor is equal to 5.5, plus any bonuses and penalties from items and effects. Only one item will affect the hero's magic armor; they will not stack, however multiple skills can have effect.

Damage reduction

HoN's damage reduction formula is identical to that of DotA:

This formula applies to both armor and magic armor. Incoming damage is multiplied by one minus this number.

In Heroes of Newerth, there are three ways to change armor: purchasing armor items; investing points into the agility stat; and using the effect of certain skills.

Heroes start with a unique base armor and gain more points from their base agility. Every point of agility adds 0.14 armor (note: not 1/7th of a point). For example, Accursed has a base armor of 2, and a base agility of 17, giving him 4.38 armor at level 1.

Effective Hit Points

Effective Hit Points (EHP) refers to the actual amount of damage a unit can take before dying. A unit with 0 armor has EHP equal to its normal hit points. Each point of armor above 0 adds EHP equal to 6% of the unit's normal hit points. A hero with 1000 hit points and 15 armor has an EHP of 1900, which means it can take nineteen 100 damage physical hits before dying, discounting regeneration.

The more you know

A rough formula for the ideal armor for a given amount of hit points is as follows:

[HP-400-unreduced damage] x 4/100

"Unreduced damage" refers to damage not reduced by physical armor, such as spell, hp loss and true damage.

A hero with 1000 hit points expecting to take 400 spell damage: [1000-400-400] x 4/100 = 8 armor is most efficient.

A hero with 2500 hit points expecting to take 1500 spell damage: [2500-400-1500] x 4/100 = 24 armor.