EBITDA Margin

EBITDA margin measures operating profitability before non-cash charges for the wear and tear of assets and before the effects of financing and tax. It is often used as a rough indicator of how much cash the core business generates from each unit of sales.

For example, a company with revenue of 2 million and EBITDA of 400,000 has an EBITDA margin of 20%.

Because it excludes depreciation and amortization, EBITDA margin can make comparisons between companies with different asset bases or accounting policies easier. It is widely used in industries such as telecoms, media and private equity, and in loan agreements.

EBITDA margin should be interpreted with care. A company with expensive equipment that must be replaced regularly may have a high EBITDA margin but much lower profitability once depreciation is considered. EBITDA also ignores working capital needs, capital spending, interest and tax, all of which use real cash.

Comparing EBITDA margin with operating margin shows how capital-intensive a business is. A large gap between the two means depreciation and amortization are significant costs.