EBITDA margin is a profitability ratio that shows what percentage of the revenue a company retains in form of operating profits. EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
EBITDA margin is calculated as the EBITDA divided by revenue. The formula is:
EBITDA margin (%) = EBITDA / Revenue.
EBITDA = Operating Income (EBIT) + Depreciation + Amortization
Since EBITDA margin is a way to measure company profitability and efficiency, the higher the EBITDA margin number, the better. Higher EBITDA margin means that the company has less operating expenses, and higher operating earnings which means that the larger portion of the company’s revenue can potentially be retained.
EBITDA margin is used by investors to compare the profitability of different businesses before capital expenditures , taxes, and capital structure are taken into account. The EBITDA margins tell investors how profitable a particular business is and what are the most profitable companies across industries. However, since EBITDA does not take into account he capital structure of the company, it might be misleading when coumarin companies with high debt capitalisation. When looking at company’s EBITDA margins we should also look for movements in the margins over time if they are increasing, decreasing or remaining stable. If EBITDA margins are decreasing that might be a sign of profitability issues in the feature.