EBITDA Margin

EBITDA margin is a profitability metric showing a company's earnings before interest, taxes, depreciation, and amortisation, expressed as a percentage of revenue.
OPEN ACCOUNT
EBITDA Margin
OPEN ACCOUNT
3 mins read
14-November-2024

EBITDA stands for earnings before interest, taxes, depreciation, and amortisation. The EBITDA margin represents a company’s operating profitability as a percentage of its revenue, giving insights into its core financial performance. It serves as a valuable metric for comparing the operational efficiency of businesses within the same industry by excluding the impact of non-operational factors.

What is the EBITDA margin?

EBITDA margin is a financial ratio that indicates the portion of revenue left after accounting for operating expenses, excluding interest, taxes, depreciation, and amortisation. The formula for calculating EBITDA margin is:

EBITDA Margin = EBITDA​/Revenue

To calculate EBITDA, start with sales revenue and subtract operating expenses, such as the cost of goods sold (COGS) and selling, general, and administrative expenses (SG&A), while excluding non-cash expenses like depreciation and amortisation. By focusing only on operational performance, the EBITDA margin helps investors evaluate a company’s core profitability, independent of capital structure and tax expenses, and can be used alongside other financial ratios to gain a more comprehensive view.

The formula for EBITDA

Calculating the EBITDA margin is a straightforward process. Here is the formula:
EBITDA margin = EBITDA/Revenue

  • EBITDA: This is the company's earnings before interest, taxes, depreciation, and amortisation. You can usually find this number on the company's income statement.
  • Revenue: This is the total amount of sales a company generates.

For example, let us say a company has an EBITDA of Rs. 10 Crore and a revenue of Rs. 100 Crore.

Here is how to calculate its EBITDA margin:

EBITDA Margin = Rs. 10 Crore/Rs. 100 Crore = 0.10 or 10%

This means that for every rupee of revenue the company earns, it gets 10 paise in profit before considering interest, taxes, depreciation, and amortisation.

Pro tip

Invest in equities, F&O, and upcoming IPOs effortlessly by opening a Demat account online. Enjoy a free subscription for the first year with Bajaj Broking.

demat

Applications of the EBITDA margin

The EBITDA margin serves several purposes for investors, such as:

  • Comparing companies: It helps you compare how profitable different companies are in the same industry without involving things like loans, taxes, or old equipment.
  • Gauging operational efficiency: You can learn how well a company turns its sales into profit from its main business activities with EBITDA. This helps figure out if a company is good at managing its costs.
  • Evaluating cash flow potential: Since EBITDA is a measure of how much cash a company makes before considering non-cash expenses, like depreciation, it gives you an idea of how much cash a company could make in the future. If you want to invest in equity of companies that make a lot of cash for things like dividends or new projects, this could be helpful for you.

Limitations of the EBITDA margin

While EBITDA is helpful, it is not the whole story you need to know when trading in equity. It has limitations that you should be aware of:

  • It does not consider how much debt a company has. So, you could think a company is financially healthy because of a high EBITDA margin, but if it has a lot of debt, it might actually be risky.
  • It does not show the full picture of cash flow. Even though EBITDA can give you an idea of how much money a company might make, it does not include everything. Things like changes in how much money is tied up in the day-to-day running of the business can affect cash flow, but EBITDA doesn't present that picture.
  • Sometimes, companies might play around with their accounting to make their EBITDA look better than it really is. So, you need to be careful and look closely at the company's overall financial health, not just its EBITDA margin.

EBITDA margin vs profit margin

Another profitability metric commonly used is the net profit margin. It takes into account all expenses and taxes, giving a more comprehensive picture of a company's overall profitability. Here is a breakdown of the key differences:

  • EBITDA margin focuses on the operating profit before interest, taxes, depreciation, and amortisation. It is helpful for comparing companies within an industry and understanding how efficiently they operate.
  • Net profit margin, on the other hand, reflects a company's profit after accounting for all expenses and taxes. It gives a complete picture of overall profitability.
  • The choice between using an EBITDA margin and net profit margin depends on what you are analysing. If you want to understand the core profitability of a company, EBITDA margin is a good starting point. But if you want to see how much profit the company actually makes after all expenses, net profit margin is the way to go.
  • Understanding both metrics and their limitations will help you get a better understanding of a company's financial health.

EBITDA margin benchmarks

Having a high EBITDA margin does not automatically mean a company is a good investment. You should check how its margin compares to others in its industry. Here's what to do:

  1. Industry research: EBITDA margins can differ a lot between industries. Check what's typical for the company's industry. Financial websites and industry reports can help.
  2. Company trends: Look at how the company's EBITDA margin has changed over time. If it has been going up consistently, that is usually better than if it has been going down, even if the current margins look similar.

Advantages and disadvantages of EBITDA margin

The EBITDA margin allows investors and analysts to assess the operating cash generated per unit of revenue. This ratio is particularly useful as a benchmark for comparing companies within the same industry. For instance, consider two Indian companies:

  • Company A has an annual revenue of Rs. 10 crore with an EBITDA margin of 15%, generating Rs. 1.5 crore in operating profit.
  • Company B has a larger revenue of Rs. 50 crore but a lower EBITDA margin of 8%, yielding Rs. 4 crore in operating profit.

In this example, while Company B earns higher overall profit due to its size, Company A operates more efficiently with a higher EBITDA margin, reflecting better cost management. However, the EBITDA margin does not account for capital expenses or interest, which can mask a company’s full financial obligations. It’s best used alongside other ratios to understand the complete financial picture.

Conclusion

The EBITDA margin is not the only measure you should look at when deciding to invest in a company. While it gives us a glimpse into profitability, there's more to consider. Look at how fast the company's sales are growing. That tells us if it is setting itself up for success in the long run. By looking at all these things together, you can make smarter investment choices.

Read other popular articles

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-qualified limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Standard Disclaimer

Investments in the securities market are subject to market risk, read all related documents carefully before investing.

Research Disclaimer

Broking services offered by Bajaj Financial Securities Limited (BFSL) | Registered Office: Bajaj Auto Limited Complex , Mumbai –Pune Road Akurdi Pune 411035 | Corporate Office: Bajaj Financial Securities Ltd,1st Floor, Mantri IT Park, Tower B, Unit No 9 & 10, Viman Nagar, Pune, Maharashtra 411014| CIN: U67120PN2010PLC136026| SEBI Registration No.: INZ000218931 | BSE Cash/F&O (Member ID: 6706) | DP registration No : IN-DP-418-2019 | CDSL DP No.: 12088600 | NSDL DP No. IN304300 | AMFI Registration No.: ARN – 163403|

Research Services are offered by Bajaj Financial Securities Limited (BFSL) as Research Analyst under SEBI Regn: INH000010043. Kindly refer to www.bajajfinservsecurities.in for detailed disclaimer and risk factors

This content is for educational purpose only.

Details of Compliance Officer: Ms. Kanti Pal (For Broking/DP/Research)|Email: compliance_sec@bajajfinserv.in/Compliance_dp@bajajfinserv.in |Contact No.: 020-4857 4486 |

Investment in the securities involves risks, investor should consult his own advisors/consultant to determine the merits and risks of investment.

Frequently asked questions

What is a good EBITDA margin?
There is no one-size-fits-all answer, but a higher margin generally indicates better profitability.
How is EBITDA margin calculated?
It is EBITDA divided by revenue (through sales). EBITDA represents earnings before interest, taxes, depreciation, and amortisation.
What is the difference between EBITDA and EBITDA margin?

EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortisation, represents a company's operating earnings by excluding expenses related to financing, taxes, and non-cash items like depreciation and amortisation. It provides an insight into the business’s core profitability from its operations alone.

Show More Show Less