**EBITDA Margin Formula Calculation (Table of Contents)**

## What is EBITDA Margin Formula?

EBITDA margin formula calculates the ratio of operating profit of the company (Earnings Before Interest, Tax, Depreciation, and Amortization) to Revenue and is used by the stakeholders for evaluation of the operating profits of a company and its comparison with other companies in the same or similar industries.

### EBITDA Margin Formula

The EBITDA Margin formula is represented as below,

**EBITDA Margin Formula = Net Income + Interest + Tax + Depreciation + Amortization / Revenue**

As already explained above, the idea of EBITDA margin is to reflect operating profits. As a result, all non-operating items are added back to net income so as to reach Operating Profits. Let us have a brief look over various components of the formula-

**Net Income**: This is the income that is accrued to the company after all operating and non-operating items (like interest, depreciation), from its operations.**Interest**: It means the cost of borrowed funds that are being borrowed from the company for carrying out its operations. The same is being added back since it relates to financing activity and its result may be different for companies with different capital structures.**Tax**: Tax is the amount that a company owes to the Government of the jurisdiction in which it operates and is calculated as per respective tax laws of the jurisdiction and is based on income earned by an enterprise.**Depreciation and Amortization**: This refers to the systematic allocation of the cost of the assets of the company over its life and is done in order to account for the reduction in the value of assets in the future due to normal wear and tear. For tangible assets, term depreciation is used and for intangibles such as patents, the term used is amortization. The same is added back since they are mere accounting estimates and may differ from company to company based on its accounting policy.

In addition to the above components, any other expense which is non-recurring in nature shall be added back to net income. These may include expenses such as loss due to natural calamities, expenses incurred on litigation and similar expenses.

### Examples of EBITDA Margin (with Excel Template)

Let’s see some simple to advanced examples of the EBITDA Margin Formula to understand it better.

#### EBITDA Margin Formula – Example #1

**Suppose, a Company named ABC Limited has earned a net income of Rs. 40,00,000/-. The same is arrived at after the company incurs the following expenses-**

**Interest on working capital limit = Rs. 5,00,000/-****Tax expenses = Rs. 12,00,000****One-time special donations by the company = Rs. 1,00,000/-****Depreciation on assets of company = Rs. 3,00,000/-**

**The revenue of the company during the year was Rs. 1,00,00,000/-**

**Solution**

Use the below-given data for the calculation of Ebitda margin

Now, first, let us calculate EBITDA.

**Calculation of EBITDA**

EBITDA = Net Income + Interest + Tax + Depreciation + Non Recurring Non-Operating Expense

- =4000000+500000+1200000+100000+300000

**EBITDA will be –**

**EBITDA = 6100000**

Calculation of EBITDA Margin

** **

- =6100000/10000000

EBITDA Margin will be –

**EBITDA Margin = 61%**

#### EBITDA Margin Formula – Example #2

**Let us consider the extracts of the Income Statement of a Company which is involved in the manufacturing of electrical types of equipment.**

**Solution**

Use the below-given data for the calculation of Ebitda margin

**Net Income**

- =7900000-2100000
**Net Income = 5800000**

**Calculation of EBITDA**

EBITDA = Net Income + Tax + Interest + Depreciation

- = 5800000 + 2100000 + 1500000 + 800000

EBITDA will be –

**EBITDA = 10200000**

Calculation of EBITDA Margin

- = 10200000/ 40000000

EBITDA Margin will be –

**=25.5%**

In order to have a better understanding, let us consider one more example.

#### EBITDA Margin Formula – Example #3

**There are two companies A Ltd and B Ltd which are a part of the automobile industry. The financial results of both companies have been published recently. The shareholders of both companies want to evaluate which of the company is doing better in the industry.**

**Solution**

Use the below-given data for the calculation of Ebitda margin

**Calculation of EBITDA of A ltd**

- =320000+90000+220000+550000

EBITDA of A ltd will be –

**EBITDA = 1180000**

Calculation of EBITDA Ratio Margin of A ltd

- =1180000/4200000

EBITDA Ratio Margin of A ltd

**=28.1%**

**Calculation of EBITDA of B ltd**

- =1000000+300000+350000+700000

EBITDA of B ltd will be –

**=2350000**

**Calculation of EBITDA Margin of B ltd**

- =2350000/7600000

EBITDA Margin of B ltd will be –

**=30.9%**

Now, after applying the formula, EBITDA of the A Ltd and B Ltd come out to 28.1% and 30.9%. This implies, though A Ltd has better gross profit margin, since its other operating expenses like employee benefit-cost and selling and administration cost are more than B Ltd, in relation to revenue, B Ltd has a better EBITDA, Thus, Company B Ltd has better operational profitability and is efficient in cost.

### Relevance and Application of the Margin

After understanding the formula of the EBITDA margin, let us understand the relevance of the same. The margin reflects the company’s operating income in reference to its revenue. Let us say, the EBITDA margin of a company is 40 per-cent. This means that 60 per-cent of the revenue proceeds are being utilized by the company to meet its operating expenses and the company is left with 40 per-cent of its revenue after meeting its operating expenses.

The ratio is being used by the stakeholders to evaluate the financial health of a company by comparing its EBITDA with the industry average, i.e. the ratio is compared for companies operating in the same industry. The higher the ratio, the higher is the profitability of the company. The investors use this measure to decide whether the company is financially sound or not.

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