Understanding EBITDA Margin

EBITDA Margin is the profitability ratio that measures a company's earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. EBITDA is the abbreviation for Earnings before Interest, Taxes, Depreciation, and Amortization.

A high EBITDA margin indicates that the operating expenses are less compared to company total revenue, while a low EBITDA margin indicates that the company is struggling with profitability. An EBITDA margin of 15% or higher is considered favorable for most industries.

The formula to derive EBITDA Margin



EBITDA - EBITDA stands for Earnings before interest, taxes, depreciation, and amortization and is found in the company's Income Statement.

Total Revenue - It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.

Example of EBITDA Margin: For the financial year, Coal India Limited reported EBITDA as Rs. 22362.85 Cr. and Total Revenue as Rs. 90026.01 Cr.
The value as per the formula [EBITDA Margin = (EBITDA/Total Revenue) x 100] is calculated as (22362 / 90026.01 = 24.84%).

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Key Highlights

EBITDA is the abbreviation for Earnings before Interest, Taxes, Depreciation, and Amortization. EBITDA Margin only tells how much companies earnings are before interest, tax, depreciation, and amortization relative to its total revenue.

EBITDA Margin of 15% or higher is considered good. It indicates the company is efficiently managing its operations.

EBITDA Margin eliminates the impacts of non-cash expenses.

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While looking at EBITDA Margin, the following points should also take into consideration:

EBITDA Margin indicates how much operating cash is generated for each rupee of revenue earned.

Higher the EBITDA Margin, the better it is. It indicates the company's expenses are less compared to its total revenue, and also it signifies that the company is leading profitable operations. And a low EBITDA margin indicates that the company is struggling with profitability.

EBITDA Margin eliminates the impacts of non-cash expenses.

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How to use EBITDA Margin effectively

Investors should look for a high EBITDA Margin. EBITDA Margin of 15% or higher is considered good. It indicates the company is efficiently managing its operations.

For better analysis, compare companies that operate in similar industries. And, comparing the past historical data and growth rate will give a brief knowledge about the company's performance.

EBITDA Margin only tells how much companies earnings are before interest, tax, depreciation, and amortization relative to its total revenue. It does not include all expenses of the company. So we should check other financial metrics like Operating Margin, Net Margin, Enterprise Value to EBITDA, etc.,

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Limitations of EBITDA Margins

EBITDA Margin is useful for investors to analyze the company's profitability. But it is not recognized in Generally Accepted Accounting Principles (GAAP).

This Margin does not consider the figures like capital expenditure or working capital that are required to a company for growth and expansion.

EBITDA Margin gives a value in percentage that is relative to the company's revenue. But it does not include all expenses.

So many investors look at EBITDA and EBITDA Margin to analyze the company's performance. EBITDA does not include the company's debt, so many companies highlight EBITDA to emphasize their success even if they are not that profitable, to draw attention away from their debts.

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