EBITDA Margin

What is EBITDA Margin?

EBITDA Margin refers to Earnings Before Interest, Taxes, Depreciation, and Amortization as a percentage of revenue. It gauges the operating profitability of a company by indicating how much EBITDA the company makes per unit of revenue.

In other words, it informs you about how effectively a company is operating its core business before considering financing expenses, taxes, and non-cash items.

Formula

EBITDA Margin=(EBITDA/Total Revenue)×100

What EBITDA Margin Tells You?

• A higher EBITDA Margin means a more profitable and efficient enterprise, with tighter control over operating expenses.
• A lower margin could imply high operating costs or inefficiencies in the business.

It facilitates comparison between companies' profitability, particularly those in the same industry.

Example

Suppose a company has:

EBITDA = ₹50 crore

Total Revenue = ₹200 crore

EBITDA Margin=(50/200)×100=25%

This implies that the company retains ₹25 of operating profit (excluding interest, tax, depreciation, and amortization) for every ₹100 of revenue.

Why EBITDA Margin is Useful?

• Eliminates the effect of financing and accounting decisions, providing a better picture of operational efficiency.
• Useful for comparing companies with varying capital structures.
• Widely applied in valuation of businesses and mergers and acquisitions.

Limitations of EBITDA Margin

• It overlooks debt amounts, capital spending requirements, and working capital needs.
• May overestimate profitability in capital-intensive industries with a lot of depreciation.
• Must be accompanied by other measures such as net profit margin, cash flow, or return on capital.