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EBT margin definition

Description

EBT margin shows company’s earnings before tax as a percentage of net sales (revenues). This ratio is very close to the net income margin as it also shows “bottom line” profit, except for the fact that the deducted income taxes are not excluded, and that’s why this ratio is sometimes called pretax profit margin. Data to calculate this ratio is collected from the income statement.

EBT margin must be considered by company’s owners, as trends of changes in the ratio value indicate how stable a company is.

Norms and limitations

Different industry has different norms for this ratio.

As we have already mentioned, slight changes of this ratio indicate stable activity of the company. It is important to observe the ratio decrease trend, because, as an example, it may mean a bigger competition and a risk of company’s bankruptcy (especially if the value of the ratio became negative).

Formula

Earnings before taxes (EBT) are calculated adding net income to taxes.

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