EBITDA Margin

By 
JAMES CHEN
 
 
Reviewed by 
DAVID KINDNESS
 
 
Updated Apr 12, 2021
What Is EBITDA Margin?
The EBITDA margin is a measure of a company's operating profit as a
percentage of its revenue. The acronym EBITDA stands for earnings before
interest, taxes, depreciation, and amortization. Knowing the EBITDA margin
allows for a comparison of one company's real performance to others in its
industry.

KEY TAKEAWAYS

 The EBITDA margin is a performance metric that measures a company's

profitability from operations.
 EBITDA is an earnings measure that focuses on the essentials of a
business: its operating profitability and cash flows.
 The EBITDA margin is calculated by dividing EBITDA by revenue.
Volume 75%
 
1:19

EBITDA Margin

Understanding EBITDA Margin

No analyst or investor would argue that a company's interest, taxes, depreciation,
and amortization are irrelevant. Nevertheless, EBITDA strips all of those
numbers out in order to focus on the essentials: operating profitability and cash
flow.

EBITDA margin = (earnings before interest and tax + depreciation +

amortization) / total revenue
That makes it easy to compare the relative profitability of two or more companies
of different sizes in the same industry. The numbers otherwise could be skewed
by short-term issues or disguised by accounting maneuvers.
Calculating a company's EBITDA margin is helpful when gauging the
effectiveness of a company's cost-cutting efforts. The higher a company's
EBITDA margin is, the lower its operating expenses are in relation to total
revenue.

Alternatives to EBITDA Margin

There are a couple of alternatives to EBITDA that are used by investors and
analysts seeking to understand a company's profitability:

 EBITA: Earnings before interest, taxes, and amortization

 EBIT: Earnings before interest and taxes

In any case, the formula for determining operating profitability is a simple one.
EBITDA (or EBITA or EBIT) divided by total revenue equals operating
profitability.

So, a firm with revenue totaling $125,000 and EBITDA of $15,000 would have an
EBITDA margin of $15,000/$125,000 = 12%.

Special Considerations
EBITDA is known as a non-GAAP financial figure, meaning it does not follow
generally accepted accounting principles (GAAP).

The GAAP standards are critical in ensuring the overall accuracy of financial
reporting, but they can be superfluous to financial analysts and investors. That is,
interest, taxes, depreciation, and amortization are not part of a company's
operating costs and are therefore not associated with the day-to-day operation of
a business or its relative success.1

Advantages and Disadvantages of EBITDA Margin

The EBITDA margin tells an investor or analyst how much operating cash is
generated for each dollar of revenue earned. That number can then be used as a
comparative benchmark.

 
A good EBITDA margin is a higher number in comparison with its peers in the
same industry or sector.

For example, a small company might earn $125,000 in annual revenue and have
an EBITDA margin of 12%, while a larger company might earn $1,250,000 in
annual revenue but have an EBITDA margin of 5%. Clearly, the smaller company
operates more efficiently and maximizes its profitability. The larger company, on
the other hand, probably focused on volume growth to increase its bottom line.

Pitfalls of EBITDA
The exclusion of debt has its drawbacks when measuring the performance of a
company. Some companies highlight their EBITDA margins as a way to draw
attention away from their debt and enhance the perception of their financial
performance.

Companies with high debt levels should not be measured using the EBITDA
margin. Large interest payments should be included in the financial analysis of
such companies.

In addition, the EBITDA margin is usually higher than profit margin. Companies

with low profitability will emphasize EBITDA margin as their measurement for
success.

Finally, companies using the EBITDA figure are allowed more discretion in
calculating it because EBITDA isn't regulated by GAAP. In other words, a firm
can skew the figure in its favor.

Frequently Asked Questions

Why Is EBITDA Margin Useful?
EBITDA focuses on the essentials, namely operating profitability and cash flow.
This makes it easy to compare the relative profitability of two or more companies
of different sizes in the same industry. The numbers otherwise could be skewed
by short-term issues or disguised by accounting maneuvers.

Calculating a company's EBITDA margin is helpful when gauging the

effectiveness of a company's cost-cutting efforts. If a company has a higher
EBITDA margin, that means that its operating expenses are lower in relation to
total revenue.

Is EBITDA Margin the Same As Operating Margin?

The EBITDA margin and operating profit margin are two different metrics that
measure a company's profitability. Operating margin measures a company's
profit after paying variable costs, but before paying interest or tax. EBITDA, on
the other hand, measures a company's overall profitability, but it may not take
into account the cost of capital investments such as property and equipment.

What Are the Advantages of EBITDA Margin?

The EBITDA margin measures a company's operating profit as a percentage of
its revenue, revealing how much operating cash is generated for each dollar of
revenue earned. Therefore, a good EBITDA margin is a relatively high number in
comparison with its peers. The simplicity of using one metric as a comparative
benchmark can be extremely advantageous to an investor.

What Are the Disadvantages of EBITDA Margin?

The EBITDA margin excludes debt in its calculation of a company's performance.
Some companies highlight their EBITDA margins as a way to draw attention
away from their debt and enhance the perception of their financial performance.
The EBITDA margin is usually higher than profit margin, which encourages
companies with low profitability to feature it when emphasizing their success.
Also, EBITDA isn't regulated by GAAP.