EBITDA margin calculator
A brief introduction to EBITDA margin calculation with CalcoPolis.
Table of Contents
- What is the EBITDA margin?
- EBITDA margin formula
- How to calculate EBITDA margin?
- How to calculate EBITDA margin if EBITDA is not present in the income statement?
- What is a good EBITDA margin?
- Why is EBITDA margin important for investors?
- Limitations of EBITDA
- What are the differences between EBITDA margin and gross margin?
- Related calculators
What is the EBITDA margin?
The EBITDA margin is a popular metric of a company's profitability, especially in the context of operational efficiency in day-to-day business. It is usually expressed as a percentage value. A high value of EBITDA margin is a sign of a company's health and financial stability and is generally assigned as a less risky business.
To describe EBITDA margin, we need to explain the concept of Earnings Before Interest, Taxes, Depreciation, and Amortization - EBITDA for short. It is a standardized indicator that represents the net income of the company. According to its name, it shows the company earnings before any interest payments and tax deductions are performed. Additionally, EBITDA doesn't discount any accounting operations like depreciation and amortization, which decreases the book value of the profit. For more details, visit our EBITDA calculator.
The EBITDA margin is simply a ratio of a company's EBITDA to its revenue in the form of a percentage value. It is handy for comparison of companies or profitability trends over time.
While the EBITDA margin is a handy gauge, it is not obligatory for companies to put this value into the income statement. However, its calculation is straightforward.
In this article, we will show how to calculate the EBITDA margin, even when the EBITDA value is not directly present in the financial report for a particular company. Further, we will explain real-life applications of this metric and show potential threats in misinterpretation of the results.
EBITDA margin formula
E = EBITDA / turnover * 100%
- EBITDA - company’s EBITDA value
- Turnover - company's total revenue in a given period
As we mentioned earlier, the EBITDA equation is very simple. The only tricky part lies in the proper interpretation of the results.
How to calculate EBITDA margin?
For a better understanding of the concept of EBITDA margin, we will present a real-life example. In practice, the EBITDA margin is usually calculated for a fiscal year or a quarter.
In order to simplify the example, we will work out the EBITDA margin for an entire year. Suppose we have a company with the following financial stats:
Turnover - $1,200,000
EBITDA - $200,000
In this case, we could apply the standard EBITDA margin formula:
E = EBITDA / turnover * 100% = $200,000 / $1,200,000 * 100% = 16,7%
As in the analyzed case, core operational efficiency of 16,7% is an excellent result for most industries.
How to calculate EBITDA margin if EBITDA is not present in the income statement?
In most countries, disclosing EBITDA in the company's financial statement is not obligatory. However, the EBITDA value can be easily derived from the EBIT indicator (for details, visit the EBIT calculator). Sometimes EBIT can be referred to as the operating income.
Since, by definition, EBITDA is basically EBIT with depreciation and amortization to calculate EBITDA, you need to add those values to the operating profit. The value of amortization and depreciation should be available in the income statement for any given period.
So our modified formula for calculating EBITDA margin from EBIT will look like this:
EBITDA = (EBIT + depreciation + amortization) / turnover * 100%
What is a good EBITDA margin?
The most basic answer is that the EBITDA margin percentage should be as high as possible. Still, to be realistic, the EBITDA margin percentage should be compared to the industry averages.
Each company's industry is different, and intense market competition always constraints the company's business model.
For sure, the EBITDA margin should have a positive value. Especially that according to its definition, it doesn't consider all the costs.
It's also a good practice to analyze the EBITDA margin for not just one period but over a longer period. An investor can tell if the company is growing or declining from the trend analysis.
Why is EBITDA margin important for investors?
Potential investors usually treat EBITDA margin as a fundamental metric of operating profitability. It reveals income statistics in a standardized form, which could be easily compared to industry benchmarks.
EBITDA margin also indicates when the potential investment will pay for itself. The growing EBITDA margin over time is another sign of business health and market potential.
Limitations of EBITDA
Apart from its advantages, the EBITDA margin has its quirks. First of all, it is prone to manipulation since it, by definition, does not account for credits, the highly leveraged companies may have very high values of EBITDA margin, but at the expense of increased risk.
EBITDA is also not a golden standard of business valuation since big enterprises have many different components that affect their business potential. Because of this, experienced investors treat this metric as one of many aspects of a company's finances that needs to be analyzed before any further investments.
What are the differences between EBITDA margin and gross margin?
Those two metrics are crucial for any business analysis; however, they have huge differences.
Gross margin is a simple value of total sales minus the cost of goods sold (COGS). Due to its simplicity, it does not consider any other cost of doing business. For more details about this metric and detailed formulas, visit our gross margin calculator.
On the other hand, the EBITDA margin includes all operational costs the company has to cover. Thanks to this, its value is much closer to the final net profit of the company.
Although the EBITDA margin is a handy metric of business profitability, it is good practice to analyze many aspects of the business to obtain a clear picture of a company's potential. On Calcopolis, you will find similar tools for detailed analysis of a company's financial performance, like return on equity calculator, return on assets calculator, Economic Value Added, or return on sales calculator.
If you would like to dive into business valuation based on EBITDA value, visit our EBITDA multiple calculators for further details.