External Factors That Influence EBITDA Margins

Companies often experience changes in their earnings before interest, taxes, depreciation, and amortization (EBITDA) margins due to external factors that they cannot control. The most prominent factors that influence the EBITDA margin are inflation or deflation in the economy, changes in laws and regulation, competitive pressures from rivals, movements in market prices of goods and services, and changes in consumer preferences.

Key Takeaways

  • There are many factors that can affect a company's EBITDA margin, including inflation and deflation, regulation, competition, market price changes, and customer preferences.
  • Factors, such as deflation and rising market prices, can boost EBITDA margins.
  • Inflation and increased regulation and competition can drag EBITDA margins down, however.

Inflation and Deflation

A company can experience rising costs of goods sold due to inflation, which causes the prices of materials and labor that go into the production of goods and services to rise. If the company is unable to pass along rising costs by raising its prices, the EBITDA margin declines. The opposite is true with deflation. If the prices for the company's factors of production decrease and the company is able to raise its prices, the EBITDA margin improves.

For example, in 2021 following the COVID19 pandemic, many retailers began experiencing shortages of qualified labor; as a result, they began raising hourly wages for employees. If such wage raises are not mitigated by the increase in prices of retailers' merchandise, the EBITDA margin may decline.

Regulation

Laws and regulations represent another external factor that can affect the company's EBITDA margin. For example, if the state or federal laws raise minimum wages, companies that rely most on low-skilled labor may experience declines in their EBITDA margins—unless they pass on all of the wage increases to the consumer by raising prices for goods and services.

Another example of regulation affecting EBITDA margins is heavy compliance costs. Coal producers in the U.S. experienced rising compliance costs as environmental laws require a reduction in the emission of carbon dioxide.

Competitive Pressures

A company may experience a decline in its EBITDA margin if new rivals emerge that challenge the status quo of the company. If the new rivals can offer better and cheaper products and services, the company may lose its market share and its sales may begin to decline.

If the company does not address competitive pressures and does not decrease its fixed costs embedded in its production processes, the EBITDA margins may begin to decline.

Market Price Movements

The company may experience shifts in EBITDA margin if the price of the product it sells shifts as a result of market forces over which the company has no control.

For instance, as the price of oil plunged in 2020 amid the COVID19 pandemic as global commerce and travel ground to a halt, many energy producers witnessed a decline in their revenues and EBITDA margins with oil futures prices even treading into negative territory for the first time. However the rebounding oil price in 2021 amid the pandemic's economic recovery was a boon for oil producers, and their EBITDA margins increased significantly.

Consumer Preferences

Shifts in consumer preferences can either improve or deteriorate the EBITDA margin by increasing or decreasing demand for the company's products and services.

For instance, health products and food have become especially popular among consumers. As a result, health food stores and health goods producers such as Whole Foods Market (now owned by Amazon) could see significant improvement in their EBITDA margins.

Article Sources

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  1. U.S. Environmental Protection Agency. "Affordable Clean Energy Rule." Accessed Sept. 3, 2021.

  2. CNBC. "How negative oil prices revealed the dangers of the futures market." Accessed Sept. 2, 2021.

  3. Fitch Ratings. "EMEA Oil Majors to Recover in 2021 on Higher Prices and Volumes." Accessed September 2, 2021.

  4. Business Wire. "Whole Foods Market Forecasts Top 10 Food Trends for 2021." Accessed Sept. 3, 2021.