EBITDA Margin is the operating profitability ratio which is helpful to all stakeholders of the company to get a clear picture of operating profitability and its cash flow position and is calculated by dividing the earnings before interest, taxes, depreciation, and amortization (EBITDA) of the company by its net revenue.
What is EBITDA Margin?
EBITDA Margin calculates how much of the EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more (earnings before interest depreciation and amortization) is generated as a percentage of Sales. EBITDA is found after deducting operating expenses (like Cost of Goods Sold, Selling General and Admin Costs, etc.) from the Total Sales.
However, please note that it should exclude any depreciation and amortization.
We note from the above graph of Facebook, Apple, and Google.
- Facebook’s margin is currently around 52% and has been consistently higher than Apple and Google. It implies that 48% of the revenue is operating expenses.
- Apple’s margin has been mostly in the range of 30-35%
- Google’s margin has been in the range of 30%-32% historically; however, it reported a lower EBITDA margin of 19.46% in its most recent quarter.
Table of contents
EBITDA Margin Formula
To Calculate EBITDA Ratio, you can use the below formula
When we drill down:
- EBI = Earnings Before Interest Expense
- T = Taxes
- D = Depreciation
- A = Amortization
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EBITDA Margin Video
Starbucks Example
Let us see the EBITDA Margin calculationThe EBITDA Margin CalculationEBITDA Margin is an operating profitability ratio that helps all stakeholders of the company get a clear picture of the company's operating profitability and cash flow position. It is calculated by dividing the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) by its net revenue. EBITDA Margin = EBITDA / Net Salesread more of Starbucks.
Below is the Income Statement snapshot of Starbucks Corp. We note that Earnings Before Interest Taxes Depreciation and Amortization is not directly provided in the income statement.
Source: Starbucks SEC Filings
2017
- EBITDA (2017) = EBIT (2017) + Depreciation and Amortization (2017) = $4,134.7 + $1,011.4 = $5,146.1 million
- EBITDA Margin Formula (2017) = EBITDA (2017) / Sales (2017) = 5146.1/22,386.8 = 22.98%
2016
- EBITDA (2016) = EBIT (2016) + Depreciation and Amortization (2016) = $4,171.9 + $980.8 = $ 5,152.7 million
- EBITDA Margin Formula (2016) = 5,152.7/21,315.9 = 24.17%
2015
- EBITDA (2015) = EBIT (2015) + Depreciation and Amortization (2015) = $3,601.0 + $893.9 = $ 4,494.9 million
- EBITDA Margin Formula (2015) = 4,494.9/19,162.7 = 23.45%
Colgate Example
In Colgate’s Income statement, we are provided with the Operating Profit numbers, i.e., EBIT. However, we are not provided with Depreciation and Amortization costsAmortization CostsAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more as a separate line item. It is because depreciation and amortization is included in the cost of salesCost Of SalesThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more and Selling admin and General Expenses.
Let us take another example of EBITDA Margin calculation
source: Colgate SEC Filings
Therefore, we need to move to the cash flow statementsThe Cash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more to identify the Depreciation and Amortization figures, which we can add back to EBIT to find EBITDA.
source: Colgate SEC Filings
EBITDA = EBIT + Depreciation and Amortization
- EBITDA (2017) = 3589 + 475 = $4064 million
- EBITDA Margin (2017) = 4064 / 15454 = 26.3%
- EBITDA (2016) = 3837 + 443 = $4280 million
- EBITDA Margin (2016) = 4280 / 15195 = 28.2%
Why is EBITDA Margin important?
#1 – Considered to be Cash Operating Profit Margin
- It is a cash operating profit marginOperating Profit MarginOperating Profit Margin is the profitability ratio which is used to determine the percentage of the profit which the company generates from its operations before deducting the taxes and the interest and is calculated by dividing the operating profit of the company by its net sales.read more that does not include the effect of capital structure and non-cash items like depreciation and amortization.
- It provides a measure of how much cash the company generates per-unit revenue. (however, cash flow from operationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more per unit revenue can be more precise in this context).
#2 – Removes Non-Operating Effects
- EBITDA margin calculation removes nonoperating effects that are unique to each company. For example, if you compare companies in the Oil and Gas sectors, each may follow different depreciation and amortization policies (straight-line depreciation policy, double declining method of depreciationDouble Declining Method Of DepreciationThe Double Declining Balance Method is one of the accelerated methods used for calculating the depreciation amount to be charged in the company's income statement. It is determined by multiplying the book value of the asset by the straight-line method's rate of depreciation and 2read more, etc.). etc.). Also, their capital structures can be significantly different.
- EBITDA removes all these nonoperating effects and also helps to make a comparison between two companies.
- It is also useful for year-over-year company analysis.
# – Alternative to Net Profit Margin
- Net Profit MarginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses.read more includes the effect of depreciation and amortization, interest expenses, and tax rates. However, EBITDA Margin does not affect such expenses even when the tax structures are very different.
Drawbacks
#1 – Window Dressing
Companies with low-profit margins may try to window dressWindow DressWindow dressing in accounting refers to the intentional manipulation of financial statements by company management in order to present a more favourable picture of the company to users of the financial statement before it is released to the public.read more their margin figures by highlighting EBITDA margin instead of Net Profit Margin.
#2 – EBITDA is a non-GAAP measure
Since EBITDA is a non-GAAP measure and is not regulated, some companies may use it to portray a rosy financial situation of the company.
#3 – Can be incorrectly applied
This margin should not be used to compare companies with high debt capitalizThis margin should not be used to compare companies with high debt capitalization. This is because their their interest expensesTheir Interest ExpensesInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more will be very high, and EBITDA margins will not capture the amount of debt. Also, if you compare two companies, one with low debt capitalization and the other one with high debt capitalization, the findings may not lead to the correct conclusions.
Industry EBITDA Margin
Apparel Industry
Below is the list of top companies in the Apparel Sector, along with their margins
| Name | Margin (TTM) | Market Cap ($ Million) |
|---|---|---|
| American Eagle Outfitters | 13.1% | 4464.8 |
| Abercrombie & Fitch | 8.4% | 1639.9 |
| Buckle | 17.9% | 1189.3 |
| Chico’s FAS | 9.9% | 1131.5 |
| DSW | 7.2% | 2224.8 |
| Guess? | 5.5% | 1823.6 |
| Gap | 12.6% | 11651.2 |
| L Brands | 17.4% | 8895.5 |
| Lululemon Athletica | 23.5% | 16468.1 |
| Children’s Place | 11.4% | 2077.5 |
| Ross Stores | 16.8% | 33685.3 |
| TJX Companies | 13.0% | 60932.3 |
| Urban Outfitters | 11.3% | 4872.1 |
- Overall, we note that the margins are not too high in the apparel sector, ranging from 10-15% on average.
- Lululemon Athletica has the highest margin in this group at 23.5%, while the lowest was that of Guess at 5.5%
Automobile Industry
Below is the list of top companies in the Apparel Sector along with their margins and Market Capitalization
| Name | Margin (TTM) | Market Cap ($ million) |
|---|---|---|
| Ford Motor | 5.1% | 39538 |
| Fiat Chrysler Automobiles | 10.8% | 33783 |
| General Motors | 16.3% | 51667 |
| Honda Motor Co | 12.0% | 53175 |
| Ferrari | 32.4% | 30932 |
| Toyota Motor | 14.9% | 192624 |
| Tesla | -3.4% | 59350 |
| Tata Motors | 10.8% | 12904 |
- We note that Tesla is unprofitable at the EBITDA Level and its margin is at -3.4%
- On the other hand, Ferrari is the most profitable with a margin of 32.4$
- Other auto manufacturers have margin in the range of 10-15% on an average
Discount Stores
Below is the list of top companies in the Discount Stores along with their margins and Market CapitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more
| Name | Margin (TTM) | Market Cap ($ million) |
| Big Lots | 7.4% | 1823 |
| Burlington Stores | 11.4% | 10525 |
| Costco Wholesale | 4.3% | 96984 |
| Dollar General | 10.2% | 26296 |
| Dollar Tree Stores | 11.7% | 21557 |
| Ollie’s Bargain Outlet | 14.0% | 4330 |
| Pricesmart | 5.8% | 2496 |
| Target | 9.2% | 43056 |
| Walmart | 5.2% | 261917 |
- We note that Walmart has the lowest Margin of 5.2% in this group
- Ollie’s Bargain Outlet, on the other hand, has the highest Margin of 14.0%
- In general (as expected), discounted stores operate at relatively lower margin levels as compared to the other sectors.
Oil & Gas
Below is the list of top companies in the Oil & Gas E&P along with their margins and Market Capitalization
| Name | Margin (TTM) | Market Cap ($ million) |
| Diamond Offshore Drilling | 24.0% | 2544 |
| Ensco | 14.0% | 3234 |
| Helmerich & Payne | 24.8% | 6656 |
| Nabors Industries | 18.7% | 2366 |
| Noble Corp | 25.9% | 1444 |
| Ocean Rig UDW | 24.3% | 2536 |
| Patterson-UTI Energy | 23.7% | 3683 |
| Rowan Companies | 41.6% | 1736 |
| Transocean | -40.5% | 5917 |
| Unit | 39.1% | 1293 |
- We note that the Margins of these oil and gas companies are generally higher at an average of 25-30%.
- Transocean is making losses with a Margin of -40.5%
- Rowan Companies is the best in the lot with a Margin of 41.6%
Recommended Articles
This article has been a guide to EBITDA margin and its definition. Here we discuss the formula to calculate EBITDA and industry examples of Starbucks and Colgate. Also, we see why this is important, along with its drawbacks. In addition, we look at the EBITDA margin of industries like discount stores, oil & gas companies, automobiles, and apparel companies. You can learn more about Ratio analysis here –
