This Site Requires Javascript
Burger Menu

EBITDA to sales ratio

EBITDA to sales ratio

What is the 'EBITDA to sales ratio'

The EBITDA to sales ratio is a financial metric used to assess a company's profitability by comparing its revenue with earnings. More specifically, since EBITDA is derived from revenue, this metric indicates the percentage of a company's earnings remaining after operating expenses. Sometimes referred to as EBITDA margin, a higher value is appreciated for this ratio as it indicates the company is able to keep its earnings at a good level via efficient processes that have kept certain expenses low.

Explaining 'EBITDA to sales ratio'

In some sense, EBITDA can also be viewed as a liquidity measurement. Because a comparison is being made between the total revenue earned and the residual net income before certain expenses, EBITDA to sales ratio reports the total amount a company can expect to receive after operating costs have been paid. Although this is not a true sense of the concept of liquidity, the calculation still reveals how easy it is for a business to cover and pay for certain costs.

Calculation of EBITDA



EBITDA is calculated by deducting all expenses from net revenues except interest, taxes, depreciation and amortization. It is not a financial ratio but rather a profitability measurement reported in dollars. The purpose of EBITDA is to report earnings prior to certain expenses that are considered uncontrollable. EBITDA provides deeper insight as to the operational standing of an organization based on the costs management can control.

Calculation of EBITDA to Sales Ratio

A calculation equal to 1 regarding the EBITDA to sales ratio indicates a company has no interest, taxes, depreciation or amortization. Therefore, it is virtually guaranteed the calculation of a company’s EBITDA to sales ratio will be less than 1 because of the additional deduction of expenses. Because of the impossibility of a negative amount for these expenses, the EBITDA to sales ratio should not return a value greater than 1. A value greater than 1 is an indicator of a miscalculation.

Usefulness of EBITDA to Sales Ratio

The EBITDA to sales ratio is most useful when comparing similar-sized companies within the same industry. Because different companies have different cost structures across industries, the EBITDA to sales ratio calculations only hold value during comparison if the underlying variables are known. For example, certain industries may experience more favorable taxation due to tax credits and deductions. These industries incur lower income tax figures and higher EBITDA to sales ratio calculations.


Ebitda To Sales Ratio FAQ

What is a good Ebitda margin by industry?

A good EBITDA margin is 60%.

How do you convert sales to Ebitda?

EBITDA Formula Equation First Method: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization. Second Method: EBITDA = Operating Profit + Depreciation + Amortization. EBITDA Margin = EBITDA / Total Revenue.

Why Ebitda is so important?

Using EBITDA EBITDA is essentially net income (or earnings) plus interest, taxes, depreciation, and amortization. EBITDA is useful for analyzing and comparing how different companies and industries are profitable, because the effects of financing and capital expenditures are removed.

What impacts Ebitda margin?

What is EBITDA Margin? EBITDA margin is a ratio that shows a company's profitability by revealing the net income a company generates before interest, taxes, depreciation, and amortization, as a percentage of revenue. The margin excludes the effect of the company's capital structure, non-cash expenses, and income taxes.

Why is Ebitda flawed?

It's possible for EBITDA to mislead because profit can also be made when you fire employees and shed management layer. For companies on the cusp of growth, owners can profit more if they keep the overhead minimized and do a lot of sales and management.

What affects Ebitda?

The factors affecting EBITDA margin the most are inflation or deflation in the economy, changes in laws and regulation, competitive pressures from rivals, movements in market prices of goods and services, and changes in consumer preferences.

What should debt to Ebitda ratio be?

Industries differ in terms of their capital intensivity, so the debt/EBITDA ratios of companies in the same industry are compared. A debt/EBITDA ratio could imply different things in different industries.

Further Reading

Enterprise valuation with track-record ratios and rates of changeEnterprise valuation with track-record ratios and rates of change
www.tandfonline.com [PDF]
… As shown in Table 4, a company is more likely to suffer financial distress if it had lower (or negative) operating cash flow to sales, a lower current ratio, higher net fixed assets … EBITDA/S -28.74 .035 CA/CL -4.62 .076 NFA/TA 48.51 .043 LTD/EQ 18.57 .073 NP/TA 14.34 .042 …

The bigger, the better? Measuring the financial health of media firmsThe bigger, the better? Measuring the financial health of media firms
www.tandfonline.com [PDF]
… As shown in Table 4, a company is more likely to suffer financial distress if it had lower (or negative) operating cash flow to sales, a lower current ratio, higher net fixed assets … EBITDA/S -28.74 .035 CA/CL -4.62 .076 NFA/TA 48.51 .043 LTD/EQ 18.57 .073 NP/TA 14.34 .042 …

The economic impact of corporate capital expenditures: focused firms versus diversified firmsThe economic impact of corporate capital expenditures: focused firms versus diversified firms
www.cambridge.org [PDF]
… As shown in Table 4, a company is more likely to suffer financial distress if it had lower (or negative) operating cash flow to sales, a lower current ratio, higher net fixed assets … EBITDA/S -28.74 .035 CA/CL -4.62 .076 NFA/TA 48.51 .043 LTD/EQ 18.57 .073 NP/TA 14.34 .042 …

The Research on the Applications and Limitations of EBITDAThe Research on the Applications and Limitations of EBITDA
www.dpi-proceedings.com [PDF]
… As shown in Table 4, a company is more likely to suffer financial distress if it had lower (or negative) operating cash flow to sales, a lower current ratio, higher net fixed assets … EBITDA/S -28.74 .035 CA/CL -4.62 .076 NFA/TA 48.51 .043 LTD/EQ 18.57 .073 NP/TA 14.34 .042 …

EVA, not EBITDA: A New Financial Paradigm for Private Equity FirmsEVA, not EBITDA: A New Financial Paradigm for Private Equity Firms
onlinelibrary.wiley.com [PDF]
… As shown in Table 4, a company is more likely to suffer financial distress if it had lower (or negative) operating cash flow to sales, a lower current ratio, higher net fixed assets … EBITDA/S -28.74 .035 CA/CL -4.62 .076 NFA/TA 48.51 .043 LTD/EQ 18.57 .073 NP/TA 14.34 .042 …


Tags

ebitda, ratio, financial, company, ratios, sales, interest, debt, earnings, valuation, year, depreciation, statistics, revenue, formula, measures, taxes, amortization, operating, company’s, ebit, income, cash, enterprise, profitability, share, finance, flow, multiple, calculation, definition, coverage, calculated, industry, including, average, type, profit, salesforce, metric, measure, price, business, multiples, total, economics, expenses
Section 508

WCAG 2.0

Section 508