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EBITDA Margin

What is 'EBITDA Margin'

EBITDA margin is a measurement of a company's operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide an investor, business owner or financial professional with a clear view of a company's operating profitability and cash flow.

Explaining 'EBITDA Margin'

For example, a firm with revenue totaling $125,000 and EBITDA of $15,000 would have an EBITDA margin of $15,000/$125,000 = 12%. The higher the EBITDA margin, the smaller a company's operating expenses in relation to total revenue, increasing its bottom line and leading to a more profitable operation.

Benefits of the EBITDA Margin

Calculating the EBITDA margin allows people to compare and contrast companies of different sizes in different industries because it breaks down operating profit as a percentage of revenue. This means that a investor, owner or analyst can understand how much operating cash is generated for each dollar of revenue earned and use the margin as a comparative benchmark.

Drawbacks of the EBITDA Margin

The exclusion of debt has its drawbacks when measuring the performance of a company. For this reason, some companies deceptively use the EBITDA margin as a way to increase the perception of its financial performance. For example, companies with high debt shouldn't be measured using the EBITDA margin because the larger mix of debt-to-equity increases interest payments, which should be included in the analysis of a company with high debt.


Further Reading


Economic-financial performance of the Brazilian sugarcane energy industry: An empirical evaluation using financial ratio, cluster and discriminant analysis
www.sciencedirect.com [PDF]
… EBITDA (particularly fixed asset purchases) exert great influence on economic profitability —a … Repeated Measure): the analysis of individual changes in companies' EBITDA margins over time … This analysis permits to examine differences in the EBITDA margin that exist among …

Using DEA and financial ratings for credit risk evaluation: an empirical analysisUsing DEA and financial ratings for credit risk evaluation: an empirical analysis
www.tandfonline.com [PDF]
… EBITDA (particularly fixed asset purchases) exert great influence on economic profitability —a … Repeated Measure): the analysis of individual changes in companies' EBITDA margins over time … This analysis permits to examine differences in the EBITDA margin that exist among …

How costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressedHow costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressed
onlinelibrary.wiley.com [PDF]
… EBITDA (particularly fixed asset purchases) exert great influence on economic profitability —a … Repeated Measure): the analysis of individual changes in companies' EBITDA margins over time … This analysis permits to examine differences in the EBITDA margin that exist among …

The relation between the GRI indicators and the financial performance of firmsThe relation between the GRI indicators and the financial performance of firms
www.inderscienceonline.com [PDF]
… EBITDA (particularly fixed asset purchases) exert great influence on economic profitability —a … Repeated Measure): the analysis of individual changes in companies' EBITDA margins over time … This analysis permits to examine differences in the EBITDA margin that exist among …

INFORMATION SYSTEM FOR MODELING ECONOMIC AND FINANCIAL PERFORMANCES.INFORMATION SYSTEM FOR MODELING ECONOMIC AND FINANCIAL PERFORMANCES.
search.ebscohost.com [PDF]
… EBITDA (particularly fixed asset purchases) exert great influence on economic profitability —a … Repeated Measure): the analysis of individual changes in companies' EBITDA margins over time … This analysis permits to examine differences in the EBITDA margin that exist among …



Q&A About EBITDA Margin


What is EBITDA margin?

EBITDA margin is a measurement of a company's operating profitability as a percentage of its total revenue. It is equal to earnings before interest, tax, depreciation and amortization (EBITDA) divided by total revenue. Because EBITDA excludes interest, depreciation, amortization and taxes, EBITDA margin can provide an investor with a clear view of a company's operating profitability and cash flow.

What is the ratio of operating income to net sales?

Operating margin.

What does ROS stand for?

Return on Sales.

Is it possible to use this ratio for all types of businesses?

Yes, it can be used for all types of businesses because it compares different industries on one scale using only two variables; revenues and expenses. This allows investors to compare companies across different sectors without having to consider any other factors such as debt ratios or capital structure differences between firms within an industry group."

Is operating margin a more or less useful metric than EBITDA Margin?

It depends on what you are trying to measure. If you want to know how much money the company is making, then EBITDA would be a better choice. If you want to know how efficiently they are using their resources, then operating margin would be better.

What does the higher the number mean in terms of financial performance?

A higher number means that there are more profits being generated from each dollar earned in revenues. This means that there are fewer expenses being incurred per dollar earned in revenue than other companies within the same industry or sector.

How do you calculate the EBITDA margin?

The formula for calculating the EBITDA margin is earnings before interest tax depreciation and amortization (EBITDA) divided by total revenue.