# EBITDA Margin

## 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.

Next Up

## BREAKING DOWN '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.

EBITDA is a financial number that measures a company's profitability before deductions that are considered somewhat superfluous to the business decision-making process. These deductions are interest, taxes, deprecation and amortization, which are not part of a company's operating costs and although important, should be dealt with separately.

## 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.

Using the example above, if a small company earned \$125,000 in annual revenue and had an EBITDA margin of 12%, its performance can be compared with a larger company that earned higher total revenue. If the larger company earned \$1,250,000 in annual revenue but had an EBITDA margin of 5%, it becomes clear that the smaller company operates more efficiently as a way to maximize profitability while the larger company has likely decided to focus on volume growth in order to increase its bottom line. This allows people to make informed business and investment decisions.

## 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, EBITDA margin is usually higher than profit margin, and companies with low profitability will rely on EBITDA margin as a measurement for success. Finally, EBITDA as a accounting number isn't regulated by GAAP, and companies can potentially skew EBITDA numbers.

RELATED TERMS
1. ### EBITDA - Earnings Before Interest, ...

Learn what EBITDA is, watch a short video to learn more and with ...
2. ### EBITDA to sales ratio

A financial metric used to assess a company's profitability by ...

Adjusted EBITDA is a measure computed for a company that looks ...
4. ### Net Debt To EBITDA Ratio

A measurement of leverage, calculated as a company's interest-bearing ...
5. ### EBITDA To Fixed Charges

A ratio used to measure a company's ability to incur additional ...
6. ### Debt/EBITDA

A measure of a company's ability to pay off its incurred debt. ...
Related Articles
1. Investing

### Explaining the EBITDA Margin

EBITDA margin can provide an investor with a cleaner view of a company's core profitability.
2. Investing

### EBITDA: Challenging The Calculation

This measure has a bad rap, but it's still a valuable tool when used appropriately.
3. Investing

### Should You Ignore EBITDA?

EBITDA may get a bad rap in the financial world, but it can actually help investors create an apples-to-apples comparison.
4. Investing

### Free Cash Flow vs EBITDA: Which Should You Analyze?

FCF and EBITDA are two ways of looking at the earnings of a business. EBITDA might be better for comparison purposes, while FCF is good for valuation.
5. Investing

### Calculating the Net Debt to EBITDA Ratio

Financial analysts typically use the net debt to EBITDA ratio to determine a company’s ability to pay its debt.
6. Investing

7. Investing

### Analyzing Operating Margins

Find out how to put this important component of equity analysis to work for you.
8. Investing

### The Three Things Most Good Stocks Have In Common

Uncover the three things most good stocks have in common: performance, profitability and value.
9. Investing

### A Look At Corporate Profit Margins

Take a deeper look at a company's profitability with the help of profit margin ratios.
10. Investing

### The Difference Between Gross and Net Profit Margin

To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
RELATED FAQS
1. ### What are the risks of relying on EBITDA margin data when making an investment?

Understand the risks of relying on EBITDA margin data when making an investment decision in a company. Learn what the EBITDA ... Read Answer >>
2. ### Why is the EBITDA margin considered to be a good indicator of a company's financial ...

Understand why the EBITDA margin is a good indicator of a company's financial health. Learn why it also has some drawbacks ... Read Answer >>
3. ### What exactly does EBITDA margin tell investors about a company?

Discover what investors can learn from the EBITDA margin. How does it compare to other profitability ratios and what are ... Read Answer >>
4. ### How do I calculate an EBITDA margin using Excel?

Learn about the EBITDA profit margin and how to use Microsoft Excel to calculate this profitability metric using data from ... Read Answer >>
5. ### Over what sort of time span should I be examining a company's EBITA margin?

Discover the time frame for evaluating the EBITDA margin of a company, and learn why it is an important profit margin for ... Read Answer >>
6. ### What is the difference between operating margin and EBITDA

Understand the key differences between, and purposes of, two measures of profitability that companies use: operating profit ... Read Answer >>
Hot Definitions
1. ### Put Option

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
2. ### Frexit

Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
3. ### AAA

The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
4. ### GBP

The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
5. ### Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
6. ### European Union - EU

A group of European countries that participates in the world economy as one economic unit and operates under one official ...