High-profit margins for a company can only be attained if the cost structure is low relative to revenue. Pricing power is usually the key to sustained high margins across industries, and it is generally associated with an economic moat that limits competitive influence.
EBITDA (earnings before interest, taxes, depreciation, and amortization) margin differs from other profitability measures because it does not account for capital intensity or the amount of leverage employed to finance the firm. Controlling for such variables is helpful for certain analyses, but depreciation and amortization are real, recurring costs of business for some firms. Also, capital structure heavily influences what portion of pre-tax income is available to common shareholders.
What Industries Have a High EBITDA Margin?
Some regularly-high EBITDA margin, capital-intensive industries include oil and gas, railroad, mining, telecom, and semiconductors.
Utilities and telecom services also benefit from high barriers to entry, limiting the number of competitors in a given geography and often leading to a monopoly. Tobacco and alcoholic beverage companies often enjoy high EBITDA margins due to barriers to entry caused by a complex regulatory environment.
Banks typically have high EBITDA margins because their non-interest expenses are relatively low compared to interest expenses. Professional services such as law, financial, consulting and private medical firms are able to charge premiums by targeting high-net-worth clients, offering highly skilled services and building strong brands.
Software and internet services companies are often very scalable with high operational leverage. As the user base for software companies grows, margins tend to expand more rapidly than in other industries. Branded drug companies are also high EBITDA-margin businesses because patent protection allows them to sell their products at very high prices.