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What is EBITDA Margin?
EBITDA Margin measures the difference between company’s operating profit and revenue, as a percentage. EBITDA is a profitability measure, higher EBITDA also represents low operating risk of a company.
Higher EBITDA Margin represents that company has lower operating expenses thus lower operating risk and company’s ability to cover its operating costs. However, such measures should be read in comparison with the numbers of competitors or similar companies in the present industry / sector.
How to calculate EBITDA Margin?
The easiest way to calculate EBITDA Margin is to add interest, taxes, depreciation and amortization expenses back to net income of the company. This process will help figure out EBITDA. Since EBITDA Margin is represented as percentage. Using following formula we can get the percentage:
EBTIDA Margin Formula:
EBITDA / Total Revenue * 100
EBTIDA Calculation Example:
For Example Company A’s Financial statements have following figures:
| Revenue | $ 900,000 |
| Net Income | $ 150,000 |
| Interest Payments | $ 9,000 |
| Taxes | $ 17,000 |
| Depreciation | $ 4,000 |
| Amortization | $ 6,000 |
By adding back the interest, taxes, depreciation and amortization expenses, we can figure out EBITDA of the company.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization Expenses
EBITDA = $150,000 + $9,000 + $17,000 + $4,000 + $6,000
EBITDA = $186,000
Now using EBITDA Margin formula we can calculate it easily as follows:
EBITDA = $186,000
Revenue = $900,000
EBITDA Margin = $186,000 / $900,000 * 100 = 20%
What is a good EBITDA Margin?
“Good” EBITDA Margin varies from industry to industry. Only comparing EBITDA Margin of two or multiple companies in same industry can provide clarity on what can be considered as Good EBITDA Margin. However, 50% EBITDA can be considered as healthy EBITDA Margin in most industries.
What is the difference between Gross Margin and EBITDA Margin?
EBITDA Margin is a measure of company’s profitability as a percentage of its total revenue. EBITDA help to analyze and compare profitability among companies and industries.
While on the other hand, Gross profit represents company’s ability to generate profit after incurring costs that are directly associated with product (e.g. Cost of goods sold).