EBITDA Margin: Formula, Calculation and Why It Matters
EBITDA Margin measures a company's operating profitability as a percentage of revenue. It's widely used to compare companies regardless of capital structure.
EBITDA Margin Formula
EBITDA Margin = EBITDA / Revenue
How to Calculate EBITDA
Method 1: From Net Income
- Net Income
- + Interest
- + Taxes
- + Depreciation
- + Amortization
- = EBITDA
Method 2: From Operating Income
- Operating Income (EBIT)
- + Depreciation
- + Amortization
- = EBITDA
Why EBITDA Margin Matters
- Comparability: Removes effects of financing and accounting decisions
- Cash flow proxy: Approximates cash generated per dollar of revenue
- Valuation: Used to calculate EV/EBITDA multiple
EBITDA vs Gross Margin vs Net Margin
| Metric | Formula | What it measures |
|---|---|---|
| Gross Margin | (Revenue - COGS) / Revenue | Production efficiency |
| EBITDA Margin | EBITDA / Revenue | Operating efficiency |
| Net Margin | Net Income / Revenue | Overall profitability |
Example
| Revenue | $10,000,000 |
| COGS | ($6,000,000) |
| Operating Expenses | ($2,500,000) |
| Depreciation | $500,000 |
| Amortization | $200,000 |
| EBITDA | $2,200,000 |
| EBITDA Margin | 22% |
Key Takeaways
- EBITDA Margin = EBITDA / Revenue
- Shows operating profitability before non-cash items
- Useful for comparing companies with different capital structures
