Date created: Nov 24, 2020 • Last updated: Apr 9, 2021
What is EBITDA Margin?
EBITDA Margin is a financial ratio that measures a company's earnings before deducting non-operating expenses as a percentage of revenue. The calculation excludes accounting expenses such as interest, taxes, depreciation, and amortization to give an overall view of profitability.Alternate names: EBITDA Margin Percentage, EBIT Margin Percentage
How to calculate
A company that generates $500,000 revenue in one year has an EBITDA of $300,000. Therefore, the EBITDA Margin for that year is 60%.
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More about this metric
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. Companies calculate EBITDA to know how much net income is generated after operating expenses, but before non-operating expenses. EBITDA Margin is derived from EBITDA, and calculates EBITDA as a percentage of total revenue. This ratio describes profitability and operating expense management.
This ratio is useful because it focuses mainly on expenses that can be actively managed by a company directly such as reducing manufacturing costs or implementing automation. It also provides an effective way to compare companies of various sizes by showing how well a company is managing its operating costs regardless of size.
Investors and analysts must be careful when tracking EBITDA Margin because it tends to be higher than other financial ratios and can hide financial problems by making a company seem more profitable than it really is. Knowing your EBITDA margin allows you to understand your operating leverage as well.