What is EBITDA & EBITDA Margin
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a measure used to evaluate a company’s operational profitability. It removes the effects of financing and accounting decisions by adding back all relative components cut out from the income. The formula for EBITDA is:
EBIT = Net Income + Interest + Taxes
EBITDA = EBIT + Depreciation + Amortization
(Thus, in method 3 of this EBITDA Margin calculator, we directly calculate EBITDA as: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization)
Here’s a simple breakdown of the components:
- Net Income: The profit a company earns after deducting all expenses from its revenue.
- Interest: The cost incurred from the company’s debt.
- Taxes: The amount paid to tax authorities.
- Depreciation: The reduction in value of tangible assets like machinery over time.
- Amortization: The reduction in value of intangible assets like patents over time.
EBITDA Margin is calculated by dividing EBITDA by the total revenue, then multiplying by 100%. The formula is:
EBITDA Margin = (EBITDA / Total Revenue) × 100%
EBITDA Margin transforms the absolute EBITDA figure into a relative measure, allowing stakeholders to better compare a company’s operational efficiency over time or against other firms. A higher EBITDA Margin denotes a more operationally efficient and potentially more financially stable company.
EBITDA Margin Calculation Example
Let’s consider two hypothetical companies, Alpha Corp and Beta Ltd, to elucidate the practical utility of the EBITDA Margin calculation.
Financial Figures for the Year:
Alpha Corp:
Net Income: $600,000
Interest: $40,000
Taxes: $100,000
Depreciation: $50,000
Amortization: $30,000
Total Revenue: $2 million
Beta Ltd:
Net Income: $800,000
Interest: $70,000
Taxes: $200,000
Depreciation: $100,000
Amortization: $50,000
Total Revenue: $5 million
We’ll begin by calculating EBITDA for both companies using the formula:
EBIT = Net Income + Interest + Taxes
EBITDA = EBIT + Depreciation + Amortization
Alpha Corp:
EBIT = $600,000 + $40,000 + $100,000 = $740,000
EBITDA = $740,000 + $50,000 + $30,000 = $820,000
Beta Ltd:
EBIT = $800,000 + $70,000 + $200,000 = $1,070,000
EBITDA = $1,070,000 + $100,000 + $50,000 = $1,220,000
Now, let’s calculate the EBITDA Margin using the formula:
EBITDA Margin = (EBITDA / Total Revenue) × 100%
Alpha Corp:
EBITDA Margin = (820,000 / 2,000,000) × 100% = 41%
Beta Ltd:
EBITDA Margin = (1,220,000 / 5,000,000) × 100% = 24.4%
In this scenario, Alpha Corp exhibits a higher EBITDA Margin, indicating better operational efficiency and profitability per revenue dollar than Beta Ltd.
That’s why we posted this EBITDA Margin calculator: to quickly help you view the operational profitability of companies relative to their revenue.
