Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail


What it is:

An EBITDA margin is a measurement of a company's earnings before interest, taxes, depreciation, and amortization as a percentage of its total revenue. The formula for EBITDA margin is:

EBITDA Margin = EBITDA/Total Revenue

How it works (Example):

The formula for EBITDA is:
EBITDA = EBIT + Depreciation + Amortization.

Let's take a look at a hypothetical income statement for Company XYZ:
To calculate EBITDA, we find the line items for EBIT ($750,000), depreciation ($50,000) and amortization (n/a) and then use the formula above:
EBITDA = 750,000 + 50,000 + 0 = $800,000

Using this information and the formula above, we can calculate Company XYZ's EBITDA margin as:

EBITDA Margin = $800,000/$1,000,000 = 80%

Because EBITDA is a measure of how much cash came in the door, an EBITDA margin is a measure of how much cash profit a company made in a year.

Why it Matters:

EBITDA is a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions or tax environments. In turn, the EBITDA margin provides more insight than a net income margin because the EBITDA margin minimizes the non-operating effects that are unique to every company. This gives investors a way to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, or companies operating in different tax brackets.

However, EBITDA margin can also be deceptive when applied incorrectly. It is especially unsuitable for firms saddled with high debt loads or those who must frequently upgrade costly equipment. Furthermore, EBITDA margins can be trumpeted by companies with low net income in an effort to "window-dress" their profitability. That's because EBITDA will almost always be higher than reported net income.

Also, because EBITDA isn't regulated by GAAP, investors are at the discretion of the company to decide what is, and is not, included in the calculation. There's also the possibility that a company may choose to include different items in their calculation from one reporting period to the next.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...