EBITDA Margin Calculator
The EBITDA margin calculator is a fantastic tool that will help you quickly find out how operational efficient your company is. This article will cover what EBITDA margin is, what is a good value for it, how EBITDA margin is calculated and will explore actual companies as examples.
What is EBITDA?
First, EBITDA goes for earnings before interest, taxes, depreciation, and amortization. It is considered a good proxy for the cash flow a company makes relative to its operations, as you could have seen in the EBITDA calculator.
Remember that the operating cash flow is the net income but adjusted back by non-cash items such as depreciation and amortization, among others. It is the same idea with EBITDA; financial and accounting reductions do not affect this metric.
Investors and analysts use this metric as a solid representation of the profits made by company operations. It is beneficial when the business does not report positive net income. Then, instead of analyzing EPS growth, you can analyze EBITDA growth.
The main EBITDA disadvantage is that it does not consider expenses of interest and taxes, which can be critical for a highly levered company, even detrimental.
What is EBITDA margin?
The EBITDA margin is a method for analyzing how operating proficient a company is. Since EBITDA does not consider interest, taxes, depreciation, and amortization, this margin is a firm representative of core operating efficiency. It is calculated by dividing EBITDA over revenues and expressed as a percentage.
The EBITDA margin calculator also works to compare companies and find out which is the best investment option. We have covered several tools like this. A few examples are the price-to-sales ratio, price-to-book ratio, and price-earnings ratio calculator. In the case of the EBITDA margin, we look for the company with a higher margin since it represents a bigger operation efficiency.
In the following paragraphs, we will discuss what a good EBITDA margin is by industry. We will also include a website where you can even complement your analysis with net profit margin benchmarks. So keep reading.
How is EBITDA margin calculated?
The EBITDA margin formula is very simple:
Although the formula is very simple, it is important to always review the trend. Thus, we recommend conducting an analysis including at least three years.
Ideally, we want a growing EBITDA percentage because it will indicate that the company is covering its gross and operating expenses more efficiently over time.
How to calculate EBITDA margin if EBITDA is not disclosed?
Although it is not mandatory for companies to disclose EBITDA, you can build it up too.
- Start with the operating income indicated in the income statement. You will consider it as EBIT.
- Extract the expenses in depreciation and amortization from the cash flow statement.
- To get EBITDA, add back depreciation and amortization to EBIT.
- Use the EBITDA margin formula indicated above to get your result.
What is a good EBITDA margin by industry?
What a crucial question, but to answer it, we will briefly check how companies operate.
A company sells products or provides services. Revenue growth reflects how great a company is doing in business. If while using the revenue growth calculator, you find out. a business that is constantly scoring revenue growth over 50%, be sure to check it deeper since you might have found a multi-bagger.
After selling its products, the company has to cover the cost of goods sold, how much inventory remaining it has and how much it has sold. Inventory efficiency can be measured in the inventory turnover calculator.
Finally, we subtract expenses. A company has operating expenses such as research & development, administrative costs, electricity, and marketing. Once we remove all of it, we get EBITDA.
Here it is important to notice that the cost of goods sold and the electricity spent by a company that produces steel are non-comparable to a cybersecurity company. Consequently, if EBITDA margin is a metric for analyzing core operation efficiency, there is no sense in comparing steel producers to companies that sell firewalls and antivirus.
The point is clear: to compare industry-related companies do matter. Here you can find aprepared by Aswath Damodaran to see what's an average EBITDA margin in various sectors of the U.S. economy.
Then, the goal is to pick up a company that has sustained a bigger EBITDA margin over several years than the average of its industry/sector.
Good EBITDA margin examples for 2020
Apple EBITDA margin
For its 2020 fiscal year, Apple reported an EBITDA equal to $77,344 million and revenues equal to $274,515 million. By using our EBITDA margin calculator, we get a 28.17%.
If we conduct the same exercise considering 2015-2020 data, we will find out that EBITDA margin shrunk from 35.29% (fiscal year 2015) to 28.17% (fiscal year 2020), but its stock returned 440%.
This might be explained because Apple has sustained over five years an EBITDA margin higher than its industry average. Note that the average EBITDA margin of an electronics-related company is 13.65% (see the link above).
Amazon EBITDA margin
For its 2020 fiscal year, Amazon reported an EBITDA equal to $48,150 million and revenues equal to $386,064 million. By using our EBITDA margin calculator, we get a 12.47%.
If we conduct the same exercise considering 2015-2020 data, we will find out that the EBITDA margin grew from 7.36% (fiscal year 2015) to 12.47% (fiscal year 2020), indicating they have had a notorious improvement in their operational efficiency. But that's not all. If we also check the stock average calculator, we find out Amazon stock returned 380% during the same period. Consequently, EBITDA margin is a metric worth tracking.
In conclusion, the EBITDA margin calculator is an insightful tool. It can be even more powerful if combined with our vast set of financial calculators.
What is EBITDA percentage?
EBITDA percentage or EBITDA margin is a metric that explores the operation efficiency of a company. Unlike net income, EBITDA is not affected by financial expenses such as interest and taxes nor by accounting expenses like depreciation and amortization. Thus, EBITDA is a representation of core operations results. Then, comparing it to revenues indicates how efficient are the company's operations.
What is a good EBITDA margin percentage?
A company's EBITDA margin percentage is good if it outperforms its industry average over time. We recommend considering an analysis not shorter than three years (preferably five years). Besides, the company you are studying shall also have low levels of debt compared to its peers.
What are the differences between gross margin vs. EBITDA margin?
The differences between the gross margin and the EBITDA margin are the following:
The gross margin only considers revenues and cost of goods sold (COGS). COGS can include inventory and workforce directly related to the manufacturing of the goods, among other directly related costs. The gross margin shows how efficiently a company manages its direct costs.
EBITDA margin includes operations-related costs such as administrative expenses, marketing, transportation, and electricity, among others. EBITDA margin shows a more precise picture of operating proficiency since it includes indirect costs too.
What to do if EBITDA margin is decreasing?
A shrinkage in EBITDA margin over two consecutive quarters might be due to business cyclicality. However, if the reduction is consistent over time, business owners or investors might start worrying about the reasons. Bad management decisions can make the EBITDA margin decrease. The stock price might be affected too. Here we recommend conducting a more extensive analysis: look into the enterprise structure (operations of the company) and the funding structure (capital employed).
How do I calculate the EBITDA margin?
- Obtain total revenue from the income statement (Profit and Loss statement)
- Get EBITDA from the same report. If it is not directly provided, you can build it up by adding back depreciation, amortization, interest, and taxes to earnings (net income).
- Divide EBITDA between total revenue, expressed as a percentage, and enjoy.