# Understanding EBITDA Margin: Definition, Formula, and Strategic Use

## What Is EBITDA Margin?

EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, serves as a vital measure of a company's operating profit represented as a percentage of its revenue. By focusing on EBITDA margin, investors and analysts can compare companies' real performance within the same industry, revealing insights into operating profitability and cost efficiency.

### Key Takeaways

*   The EBITDA margin measures a company's operating profit as a percentage of its revenue, making it a useful tool for comparing the profitability of different companies in the same industry.
*   EBITDA excludes interest, taxes, depreciation, and amortization, allowing for a clearer picture of a company's operational efficiency and cash flow, but it might not account for high debt levels.
*   While helpful for comparisons, EBITDA can be misleading if used to mask low profitability or to draw focus away from a company’s debt obligations.
*   The EBITDA margin is not regulated by GAAP, meaning companies might calculate it differently, potentially leading to inconsistent or skewed results.

  

  

![EBITDA Margin](https://www.investopedia.com/thmb/H_WfgluS09OFXkSXqqC2P26R7so=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ebitda_definition_final_0831-c8a1b26d38db49829a69a86f3c294779.jpg)

*— Sydney Saporito / Investopedia*

## Understanding EBITDA Margin

A company’s interest, taxes, depreciation, and amortization all have important implications for a business’s finances. However, EBITDA strips all of those numbers out in order to focus on the essentials: operating profitability and [cash flow](https://www.investopedia.com/terms/c/cashflow.asp).

> EBITDA margin = (earnings before interest and tax + depreciation + amortization) / total revenue

This makes it easy to compare the relative profitability of two or more companies of different sizes in the same industry. Otherwise, the numbers could be skewed by short-term issues or disguised by accounting maneuvers.

Calculating a company’s EBITDA margin is helpful when gauging how well it cuts costs. A higher EBITDA margin indicates lower operating expenses relative to total revenue.

So, a firm with revenue totaling $125,000 and EBITDA of $15,000 would have an EBITDA margin of:

> $15,000/$125,000 = 0.12 = 12%

## Comparing EBITDA Margin with Other Profitability Metrics

There are a couple of alternatives to EBITDA that are used by investors and analysts seeking to understand a company’s profitability:

*   [EBITA](https://www.investopedia.com/terms/e/ebita.asp#:~:text=Earnings%20before%20interest%2C%20taxes%2C%20and,company's%20real%20performance%20over%20time.): Earnings before interest, taxes, and amortization
*   [EBIT](https://www.investopedia.com/terms/e/ebit.asp): Earnings before interest and taxes

The formula for operating profitability is straightforward: divide EBITDA (or EBITA or EBIT) by total revenue.  

> **Important**
>
> When comparing profitability among companies, always use the same calculation for accuracy.

## Specific Factors to Consider With EBITDA Margin

EBITDA is known as a [non-GAAP](https://www.investopedia.com/terms/n/non-gaap-earnings.asp) financial figure, meaning it does not follow generally accepted accounting principles (GAAP).

GAAP standards ensure accurate financial reporting, but can be unnecessary for analysts and investors. That is, interest, taxes, depreciation, and amortization are not part of a company’s operating costs and are therefore not associated with the day-to-day operation of a business or its relative success. EBITDA is calculated using GAAP figures from financial statements.

## The Pros and Cons of Using EBITDA Margin

The EBITDA margin tells an investor or analyst how much operating cash is generated for each dollar of revenue earned. The benefit of this calculation is that it can be used as a comparative benchmark to compare businesses within the same industry.

For example, a small company might earn $125,000 in annual revenue and have an EBITDA margin of 12%, while a larger company might earn $1,250,000 in annual revenue but have an EBITDA margin of 5%.

This suggests the smaller company is more efficient and [maximizes profitability](https://www.investopedia.com/ask/answers/032715/why-ebitda-margin-considered-be-good-indicator-companys-financial-health.asp). The larger company, on the other hand, probably focused on volume growth to increase its [bottom line](https://www.investopedia.com/terms/b/bottomline.asp).

> **Fast Fact**
>
> A good EBITDA margin is relative. However, a higher number in comparison with its peers in the same industry or sector indicates a greater level of profitability.

### Pitfalls of EBITDA

The exclusion of debt has its drawbacks when measuring the performance of a company. Some companies highlight their EBITDA margins as a way to draw attention away from their [debt](https://www.investopedia.com/terms/d/debt.asp) and enhance the perception of their [financial performance](https://www.investopedia.com/terms/f/financialperformance.asp).

Companies with high debt levels should not be measured using the EBITDA margin. Large [interest](https://www.investopedia.com/terms/i/interest.asp) payments should be included in the financial analysis of such companies.

In addition, the EBITDA margin is usually higher than the [profit margin](https://www.investopedia.com/terms/p/profitmargin.asp). Companies with low profitability will emphasize EBITDA margin as their measurement for success.

Finally, [companies](https://www.investopedia.com/terms/c/company.asp) using the EBITDA figure are allowed more discretion in calculating it because EBITDA isn’t regulated by [GAAP](https://www.investopedia.com/terms/g/gaap.asp). In other words, a firm can skew the figure in its favor.

## Why Is EBITDA Margin Useful?

EBITDA focuses on operating profitability and cash flow, making it easy to compare profitability across companies of different sizes in the same industry. This makes it easy to compare the relative profitability of two or more companies of different sizes in the same industry. Calculating a company’s EBITDA margin is helpful when gauging the effectiveness of a company’s cost-cutting efforts. A higher EBITDA margin means the company has lower operating expenses compared to total revenue.

## Is EBITDA Margin the Same As Operating Margin?

The EBITDA margin and operating profit margin are two different metrics that measure a company’s profitability. [Operating margin](https://www.investopedia.com/terms/o/operatingmargin.asp) measures a company’s [profit](https://www.investopedia.com/terms/p/profit.asp) after paying variable costs but before paying interest or tax. EBITDA, on the other hand, measures a company’s overall profitability, but it may not take into account the cost of capital investments such as property and equipment.

## What Are the Advantages of EBITDA Margin?

The EBITDA margin measures a company’s operating profit as a percentage of its revenue, revealing how much operating cash is generated for each dollar of revenue earned. Therefore, a good EBITDA margin is a relatively high number compared with its peers. The simplicity of using one metric as a comparative benchmark can be helpful to investors.

## What Are the Disadvantages of EBITDA Margin?

The EBITDA margin excludes debt in its calculation of a company’s performance. Some companies highlight their EBITDA margins as a way to draw attention away from their debt and enhance the perception of their financial performance. The EBITDA margin is usually higher than profit margin, which encourages companies with low profitability to feature it when emphasizing their success. Also, EBITDA isn’t regulated by GAAP.

## The Bottom Line

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. The EBITDA margin is a measure of a company’s [operating profit](https://www.investopedia.com/terms/o/operating_profit.asp) as a percentage of its revenue. EBITDA margin is calculated by dividing EBITDA by total revenue.

EBITDA margin lets investors and financial analysts easily compare the profitability of multiple companies in the same sector or industry. However, it isn’t the best measurement for all businesses. EBITDA doesn’t take debt into account, which can give a misleading picture of the financial position of high-debt companies. It can also be used to disguise a low profit margin. Due to these limitations, EBITDA should be one of several [metrics](https://www.investopedia.com/terms/m/metrics.asp) investors use to analyze business performance.

> **Article Sources**
>
> 1.  Deloitte Accounting Research Tool (DART). “[Why the FASB Cares About Non-GAAP Performance Measures](https://dart.deloitte.com/USDART/ov-resource/b73a0284-d9bc-11e6-967b-ab3136003f42.html#:~:text=in%20the%20markets.-,If%20non%2DGAAP%20measures%20developed%20by%20management%20are%20inconsistent%2C%20misleading,%2C%20and%20deserve%2C%20much%20better.).”