What Does the EBITDA Margin Imply About a Company's Financial Condition?

The EBITDA margin is considered to be a good indicator of a company's financial condition because it evaluates a company's performance without needing to take into account financial decisions, accounting decisions or various tax environments.


The EBITDA margin measures a company's earnings before interest, tax, depreciation, and amortization as a percentage of the company's total revenue.

EBITDA margin = (earnings before interest and tax + depreciation + amortization) / total revenue

Because EBITDA is calculated before any interest, taxes, depreciation, and amortization, the EBITDA margin measures how much cash profit a company made in a given year. A company's cash profit margin is a more effective indicator than its net profit margin because it minimizes the non-operating and unique effects of depreciation recognition, amortization recognition, and tax laws.

Although the EBITDA margin is a good indicator of a company's financial circumstances, it has a few drawbacks. EBITDA is not regulated by generally accepted accounting principles (GAAP), so it is not normally calculated by companies that report their financial statements under GAAP.

Financial Performance

The EBITDA margin is an ineffective indicator of financial performance for companies with high levels of debt or for companies that consistently purchase expensive equipment for their operations. If a company has a low net income, it can also use the EBITDA margin as a way to inflate its financial performance. This is because a company's EBITDA margin is almost always higher than its profit margin.

Other financial ratios, such as operating margin or profit margin, should be used concurrently with the EBITDA margin when evaluating the performance of a company.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Business Development Bank of Canada. "EBITDA."

  2. U.S. Securities and Exchange Commission. "Form 8-K Verizon Communications Inc."

  3. U.S. Securities and Exchange Commission. "Non-GAAP Financial Measures."

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.