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Guide to EBITDA Margin

What Is EBITDA Margin & How Does It Work?
Mike Zaccardi

Mike Zaccardi

Updated June 10, 2022
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One way to measure your business’s profitability is to calculate its EBITDA margin. EBITDA stands for earnings before interest, taxes, depreciation, and amortization; EBITDA margin looks specifically at a company’s operating profits (EBITDA) as a percentage of revenue. EBITDA margin is often used as an alternative to standard measurements of profitability such as net income. Proponents of EBITDA margin believe it offers a more accurate reflection of financial operations, since it removes expenses that may hide how a company is truly performing.Read on to learn the EBITDA margin formula, why this accounting metric is important to know, and exactly what it can tell you about your small business.  

What Is EBITDA Margin? 

To fully understand the EBITDA margin, you need to first understand EBITDA. An acronym for earnings before interest, taxes, depreciation, and amortization, EBITDA is a measure of a company’s overall financial performance. EBITDA is similar to net income except that it adds back interest on debts, income taxes, and non-cash depreciation and amortization expenses. The benefit of EBITDA vs net income is that it is able to show earnings before the influence of capital structure and accounting or financial deductions.The EBITDA margin is simply EBITDA/revenue, and is expressed as a percentage. Like other margin ratios, EBITDA margin gives insight into a company's ability to turn sales into a profit. Recommended: EBITDA vs Revenue: How They Are Different & How They Are Used 

EBITDA Margin Formula

The EBITDA margin formula is:  EBITDA margin = EBITDA / total revenue 

How Does EBITDA Margin Work? 

The EBITDA margin shows how much operating expenses are eating into your company’s gross profit. In other words: It tells you what percentage of each dollar earned in revenue is making its way into EBITDA. Generally, the higher the EBITDA margin, the less risky a company is considered financially. For this reason, a good EBITDA margin can make it easier to get a small business loan with favorable rates and terms. EBITDA margin is also used by investors and analysts to compare the relative profitability of two or more companies of different sizes in the same industry. It’s important to note, however, that EBITDA margin is considered a non-GAAP financial figure, meaning it does not follow generally accepted accounting principles (GAAP). 

EBITDA Margin Calculation 

EBITDA is calculated by taking sales revenue and deducting operating expenses, such as the cost of goods sold (COGS), and selling, general and administrative expenses, but excluding depreciation and amortization.Here how:EBITDA = Operating Income (EBIT) + Depreciation + AmortizationEBITDA margin = EBITDA / Total revenue

Uses of EBITDA Margin & What It Tells Us 

EBITDA margin tells how efficiently a company’s revenue is converted into earnings (before interest, taxes, and depreciation/amortization are subtracted). If a company has a higher EBITDA margin, that means that its operating expenses are lower in relation to total revenue. This can make it easier to qualify for many types of small business loans.As a business owner, you can also learn a lot from knowing your EBITDA margin. For one, you can compare it to the EBITDA margins of previous periods in order to see any trends in profitability and/or gauge the effectiveness of cost-cutting efforts. You can also compare your company’s EBITDA margin to the industry standard. Generally, having a higher EBITDA margin compared to your competitors indicates that your company is producing a higher amount of profits from its core operations. Analysts, investors, and lenders also use EBITDA margin to determine a company’s stability and long-term profitability. In addition, they may look at a company’s Debt/EBITDA ratio, which measures a company's ability to pay off its current debt load.

EBITDA Margin vs EBITDA Compared

Pros and Cons of Using EBITDA Margin

Alternatives to EBITDA Margin 

EBITDA margin is one of many ways to calculate your business’s profitability and operational efficiency.  Here are some others you may want to use.

EBITA 

EBITA is earnings before interest, taxes, and amortization. It’s an alternative to EBITDA that does not back out depreciation.  EBITA is used more commonly with firms that do not have large amounts of capital expenditures that might result in high depreciation expenses. 

EBIT 

EBIT is earnings before interest and taxes. When comparing EBIT vs EBITDA, there are some similarities, but a few key differences. Both exclude interest and taxes. However, EBITDA takes EBIT a step further by also backing out the non-cash charges of depreciation and amortization. EBIT is often used by capital-intensive firms and companies with substantial amounts of amortization of intangible assets (like patents and goodwill), since these numbers can skew measures of profitability.  

Operating Margin 

Like EBITDA margin, operating margin is a profitability ratio that owners, investors, and analysts use to evaluate a company's ability to turn a dollar of revenue into a dollar of profit after accounting for expenses. Both operating margin and EBITDA margin measure a company's profit after paying variable costs, but before paying interest or tax. EBITDA, however, also excludes depreciation and amortization expenses.

EBITDA Margin Example 

Let’s look at an example of how to calculate a company’s EBITDA margin.Company XYZRevenue: $5 million Net income: $500,000Interest expenses: $50,000Taxes: $80,000Depreciation and amortization expenses: $60,000  EBITDA = $690,000 (net income + interest, taxes, depreciation, and amortization)EBITDA margin =  $690,000/$5 million = 13.8% 

The Takeaway

EBITDA margin is a measurement of operating profit as a percentage of revenue. It is calculated by dividing EBITDA by revenue and expressed as a percentage. The EBITDA margin formula is commonly used to compare the business performance of firms within the same industry. Lenders might also use EBITDA margin to assess the financial health of a small business applying for a loan. Understanding the variables in the EBITDA margin calculation can help business owners run their businesses more efficiently. 

3 Small Business Loan Tips

  1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

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Frequently Asked Questions

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About the Author

Mike Zaccardi

Mike Zaccardi

Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
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