What is EBITDA Margin
EBITDA margin is a financial ratio that measures the company’s ability to manage its cost of the operating activities to generate as much profit for the company before the interest, taxes, depreciation, and amortization expenses. The EBITDA can be calculated by dividing the company’s EBITDA by the net sales.
The EBITDA margin indicates how many dollars of the profit before the interest, taxes, depreciation, and amortization expenses that the company generated for each dollar of the net sales. In other words, it measures the ability to utilize operating costs.
Therefore, a higher EBITDA margin a higher profit before interest, taxes, depreciation, and amortization the company generates from sales and vice versa.
The EBITDA margin is used when the stakeholders want to determine the profitability of the company by ignoring the costs of the capital structure, tax, depreciation, and amortization which is not important to the performance of the ongoing operations. Normally, it uses to compare against competitors or industry averages.
Other than that, the EBITDA margin is excluding the debt. Sometimes the company uses the EBITDA margin (and EBITDA alone) to draw attention to its debt by overlooking its debt by the growing revenue generated when the company borrows heavily to boost its sales. This is the reason why a high EBITDA margin is not always good.
EBITDA Margin Formula
The EBITDA margin can be calculated by dividing the earnings before interest, taxes, and depreciation & amortization (EBITDA) by the net sales as the following EBITDA margin formula below:
EBITDA Margin = EBITDA / Net Sales
where
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
or
EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization
How to Calculate EBITDA Margin
For example, the Feriors company limited has the following financial results last year:
- Net Sales: $3,500,000
- Net Income: $2,000,000
- Interest Expense: $20,000
- Taxes: $100,000
- Depreciation & Amortization: $400,000
- EBITDA: $2,520,000
The Feriors’ EBITDA Margin will be: = 2,520,000 / 3,500,000 = 0.72 or 72%
The EBITDA margin of 0.72 or 72% means the company generates 72 cents of earnings before interest, taxes, depreciation, and amortization for each $1 of the net sales. In other words, the 28 cents (100 – 72) for each $1 of the net sales is the cost of the operating activities.
Frequently Asked Questions
EBITDA margin is a financial ratio that measures the company’s ability to manage its cost of the operating activities to generate as much profit for the company before the interest, taxes, depreciation, and amortization expenses.
The EBITDA margin can be calculated by dividing EBITDA by the net sales as the following formula: EBITDA Margin = EBITDA / Net Sales
The higher or growing is a good EBITDA margin value. A higher EBITDA margin indicates a higher profit before interest, taxes, depreciation, and amortization the company generates from sales and vice versa.
