Sitemap

EBITDA margin definition

Description

EBITDA margin ratio is considered as one of the most popular profitability ratios, because it excludes depreciation and amortization. In order to calculate EBITDA data must be collected from the income statement and cash flow statement. This ratio does not calculate the company's capital, non-cash expenses and tax incomes. Therefore it rather clearly indicates company’s operating profitability.

This measure can provide more detailed information for the investors about a company's core profitability than about operating profitability ratio. As for the owners, this ratio is important as it eliminates non-cash expenses. Also this ratio is important for bankers and other creditors because it shows company’s ability to cover its long term debts.

Norms and limitations

The higher the EBITDA margin value, the less operating expenses and the bigger company’s earnings are.

An increasing EBITDA ratio indicates better performance of the company. A higher value would indicate that the company is able to keep its’ income at a sufficient level.

Formula

EBITDA is calculated by adding net income plus interest expense plus taxes plus depreciation and amortization.

Net sales (revenues, sales) can be briefly described as sales, deducting returns and discount for customers.