EBITDA margin

The formula

• m = 100 · EBITDA / I

EBITDA is the operating profit with depreciation and amortisation added back, and I the revenue. The percentage says what each unit of sales earned before capital costs, interest and tax.

A worked example

Revenue of 2,000,000 and an EBITDA of 330,000: m = 100 · 330,000 / 2,000,000 = 16.5%. The same company’s operating profit is 250,000, an operating margin of 12.5%; the four points between them are the depreciation, 80,000 on 2,000,000.

The gap is the assets

For a consultancy with little more than desks, depreciation is small and the two margins almost coincide. For a factory, a shipping line or a telecom network the EBITDA margin can be twice the operating margin. The gap is the share of sales that goes to replacing what wears out, and a comparison that uses the EBITDA margin alone treats that cost as free.

Where it helps

Between companies that account for their assets differently, or between years in which a write-down distorts the operating profit, the EBITDA margin is the steadier figure. It is also the margin lenders quote, because it is closer to the cash available to pay them.

Common mistakes

• Taking it for the profit margin. Interest, tax and depreciation all still have to be paid out of it.
• Comparing with a competitor’s operating margin. The two margins answer different questions.
• Using an adjusted EBITDA without saying so. The adjustments change the margin.

Frequently asked questions