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

EBITDA Margin

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.

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