What is the 'EBITDA To Sales Ratio'

The EBITDA to sales ratio is a financial metric used to assess a company's profitability by comparing its revenue with earnings. More specifically, since EBITDA is derived from revenue, this metric indicates the percentage of a company's earnings remaining after operating expenses. Sometimes referred to as EBITDA margin, a higher value is appreciated for this ratio, as it indicates the company is able to keep its earnings at a good level via efficient processes that have kept certain expenses low.

BREAKING DOWN 'EBITDA To Sales Ratio'

In some sense, EBITDA can also be viewed as a liquidity measurement. Because a comparison is being made between the total revenue earned and the residual net income before certain expenses, EBITDA to sales ratio reports the total amount a company can expect to receive after operating costs have been paid. Although this is not a true sense of the concept of liquidity, the calculation still reveals how easy it is for a business to cover and pay for certain costs.

Calculation of EBITDA to Sales Ratio

EBITDA is an abbreviation for "earnings before interest, taxes, depreciation and amortization." Thus, it is calculated by deducting all expenses from earnings, also known as net revenues, except interest, taxes, depreciation and amortization. The purpose of EBITDA is to report earnings prior to certain expenses that are considered uncontrollable. EBITDA provides deeper insight into the operational standing of an organization based on the costs management can control.

The EBITDA to sales ratio is equal to EBITDA/sales. A calculation equal to 1 regarding the EBITDA to sales ratio indicates a company has no interest, taxes, depreciation or amortization. Therefore, it is virtually guaranteed the calculation of a company’s EBITDA to sales ratio will be less than 1 because of the additional deduction of expenses. Because of the impossibility of a negative amount for these expenses, the EBITDA to sales ratio should not return a value greater than 1. A value greater than 1 is an indicator of a miscalculation.

Usefulness of EBITDA to Sales Ratio

The EBITDA to sales ratio is most useful when comparing similar-sized companies within the same industry. Because different companies have different cost structures across industries, the EBITDA to sales ratio calculations hold the most value during comparison if the underlying variables are known. For example, certain industries may experience more favorable taxation due to tax credits and deductions. These industries incur lower income tax figures and higher EBITDA to sales ratio calculations.

Another aspect in regards to the usefulness of the EBITDA to sales ratio relates to the use of depreciation and amortization methods. Because companies can select different depreciation methods, EBITDA to sales ratio calculations eliminate the depreciation expense from consideration to improve consistency between companies.

RELATED TERMS
  1. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  2. EBITDA To Fixed Charges

    EBITDA To Fixed Charges is a ratio used to measure a company's ...
  3. Net Debt To EBITDA Ratio

    Net debt to EBITA ratio is a measurement of leverage, calculated ...
  4. Earnings Before Interest, Tax, ...

    Earnings Before Interest, Tax, Amortization And Exceptional Items ...
  5. Operating Ratio

    The operating ratio shows the efficiency of a company's management ...
  6. EBITDA-To-Interest Coverage Ratio

    The EBITDA-to-interest coverage ratio is a ratio that is used ...
Related Articles
  1. 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.
  2. Investing

    EBITDA

    Otherwise known as Earnings Before Interest, Taxes, Depreciation and Amortization. Learn more about this indicator of a company's financial performance.
  3. Investing

    Turning Dimes Into Dollars

    We examine five stocks from apparel stores and specialty retail industries, looking for the most efficent companies at turning capital expenditures into profits.
  4. Investing

    Valeant Meltdown After Bad Q4 & FY16 Earnings

    VRX reported results and guidance that paint a picture of declines everywhere.
  5. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  6. Investing

    ETF Gross vs. Net Expense Ratios: How They Differ

    If you're going to invest in ETFs, you should know the intricacies of expense ratios.
  7. Investing

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  8. Investing

    10 Common Finance Terms Every Newbie Needs to Know

    In order to get a better understanding of what you read in markets news, expand your vocabulary and explore the terms you commonly encounter.
RELATED FAQS
  1. How are operating income and EBITDA different?

    EBITDA and operating income are both important when analyzing a company's financial health. However, there are differences ... Read Answer >>
  2. What does the EBITDA margin infer about a company's financial health?

    The EBITDA margin evaluates a company's performance without taking into account financial decisions, accounting decisions ... Read Answer >>
  3. How do I calculate an EBITDA margin using Excel?

    Learn about the EBITDA (earnings before interest, tax, depreciation and amortization) profit margin and how to use Microsoft ... Read Answer >>
  4. What is the difference between EBIT and EBITDA?

    EBIT and EBITDA are two metrics that measure profitability whereby they share similarities, but the differences in their ... Read Answer >>
  5. What external factors can influence EBITDA margins?

    Learn what external factors influence EBITDA margins, such as consumer preferences, laws, inflation or deflation, price movements ... Read Answer >>
  6. What is the difference between EBITDA margin and profit margin?

    The difference between the EBITDA profit margin and standard profit margins is simply a matter of its exclusion from the ... Read Answer >>
Trading Center