EBITDA Margin

What it is

EBITDA margin measures a company’s operating profitability as a percentage of revenue. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. By removing non-operating items and non-cash charges, the EBITDA margin highlights core operating performance and cash-generation potential.

Formula and example

EBITDA margin = EBITDA / Revenue

Or, using components:
EBITDA margin = (EBIT + Depreciation + Amortization) / Revenue

Example: If revenue = $125,000 and EBITDA = $15,000:
EBITDA margin = $15,000 / $125,000 = 12%

What it shows

• How much operating cash (before finance, tax, and non-cash charges) is generated per dollar of revenue.
• Relative cost efficiency: higher margins indicate lower operating costs relative to revenue.
• A quick basis for comparing companies of different sizes within the same industry.

Common alternatives

• EBIT (earnings before interest and taxes): includes depreciation and amortization.
• EBITA (earnings before interest, taxes, and amortization): excludes depreciation only.
• Operating margin: operating profit divided by revenue (may include some non-cash charges).
• Net profit margin: bottom-line profitability after all costs, taxes, and interest.

When comparing companies, always use the same metric and calculation method.

Uses

• Benchmarking operating profitability across peers and time.
• Screening candidates for further analysis (e.g., high-margin businesses).
• Valuation inputs (commonly used with enterprise value: EV/EBITDA).
• Assessing effectiveness of cost-control initiatives.

Limitations and risks

• Non‑GAAP: EBITDA is not standardized under GAAP, so companies may calculate it differently.
• Ignores capital structure: excludes interest and thus can hide the effects of heavy debt.
• Ignores tax differences and non-cash costs: depreciation and amortization matter for asset-heavy businesses (manufacturing, utilities, telecom).
• Can be used to obscure poor net profitability or cash-flow issues.
• Not a substitute for cash-flow analysis or balance-sheet assessment.

When to use (quick guide)

• Use EBITDA margin when comparing operational efficiency across companies within the same industry and with similar capital intensity.
• Avoid relying on it alone for companies with high leverage, large capital expenditures, or substantial tax/timing differences.
• Combine with other metrics (net margin, free cash flow, debt ratios, ROIC) for a complete financial picture.

Bottom line

EBITDA margin is a useful shorthand for operating profitability and cost efficiency, especially for cross-company comparisons. However, because it excludes interest, taxes, depreciation, and amortization and is non‑GAAP, it should be used alongside other metrics to assess a company’s true financial health and sustainability.