EBITDA Margin
EBITDA Margin is a metric that tells you about a company's operating performance. Is it able to analyze the performance of a company's cost-cutting efforts. It tells an analyst how much of operating cost is generated for each unit of revenue. It is calculated as:
EBITDA Margin = (EBITDA / Total Revenue)
where,
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Consider the following example:
Company A Total Revenue = $120,000
Company A EBITDA = $400,000
Company A EBITDA Margin = ($120,000/$400,000) = 0.3
Company A EBITDA Margin % = 30%
Company B Total Revenue = $120,000
Company B EBITDA = $200,000
Company B EBITDA Margin = ($120,000/$200,000) = 0.6
Company B EBITDA Margin % = 60%
Based on the above example, Company A operates in a more effective manner with increased profits than the Company B. In conclusion, lower the EBITDA Margin better the performance of a company.
Similar to EBITDA, EBITDA Margin too does not adhere to GAAP and can be skewed by the company. It also strips out any operating costs and makes it easier to compare and contrast between companies. Companies with huge debts should not use this metric as the Interests be taken out of the calculation of this metric. Also, this would result to be larger than profit margin and thus, companies could emphasize on EBITDA Margins to show a better performance. So a company with low income can use EBITDA Margin to inflate its performance index.
It is always advised to used this metric along with another financial metric to make a better analysis.