# EBITDA Margin Article byKartik Sharma EBITDA Margin is the operating profitability ratio which is helpful to all stakeholders of the company to get 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 (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.

• 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, in its most recent quarter, it reported a lower EBITDA Margin of 19.46%.

### EBITDA Margin Formula

EBITDA = Operating Income (EBIT) + Depreciation + Amortization

To Calculate EBITDA Ratio, you can use the below formula

EBITDA Margin = EBITDA/Net Sales

When we drill down:

• EBI = Earnings Before Interest Expense
• T    = Taxes
• D   = Depreciation
• A   = Amortization

### Starbucks Example

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

Let us take another example of EBITDA Margin calculation

In Colgate’s Income statement, we are provided with the Operating Profit numbers i.e., EBIT. However, we are not provided with Depreciation and as a separate line item. It is because depreciation and amortization is included in the and Selling admin and General Expenses.

source: Colgate SEC Filings

Therefore, we need to move to 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 basically a cash that does not include the effect of capital structure as well as non-cash items like depreciation and amortization.
• It provides us with a measure of how much cash the company is generating per unit revenue. (however, per unit revenue can be more precise in this context)

#### #2 – Removes Non-Operating Effects

• EBITDA margin calculation basically removes nonoperating effects that are unique to each company. For example, if you compare companies in Oil and Gas sectors, each company may follow a different depreciation and amortization policies (straight-line depreciation policy, , 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 a year over year company analysis.

#### # – Alternative to Net Profit Margin

• includes the effect of depreciation and amortization, interest expenses as well as tax rates. However, EBITDA Margin does not get affected by such expenses even when the tax structures are very different.

### Drawbacks

#### #1 – Window Dressing

Companies with low-profit margins may try to 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 capitalization as 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

• 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

• We note that Tesla is unprofitable at the EBITDA Level and its margin is at -3.4%
• Ferrari, on the other hand, 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

• 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

• We note that the Margins of these oil and gas companies is 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%

### EBITDA Margin Video

This article has been a guide to what is EBITDA Margin and its definition. Here we discuss the formula to calculate EBITDA along with 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 –