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]
- Using DEA and financial ratings for credit risk evaluation: an empirical analysis – www.tandfonline.com [PDF]
- How costly is financial (not economic) distress? Evidence from highly leveraged transactions that became distressed – onlinelibrary.wiley.com [PDF]
- The relation between the GRI indicators and the financial performance of firms – www.inderscienceonline.com [PDF]
- INFORMATION SYSTEM FOR MODELING ECONOMIC AND FINANCIAL PERFORMANCES. – search.ebscohost.com [PDF]
