What is EBITDA Margin in Accounting? Definition, Formula and Examples

What is EBITDA?

Before we look into EBITDA margin, let’s first look at what EBITDA actually is.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation.

Where:

Earnings = net income before deductions

Interest = the cost of borrowing money

Taxes = government charges on income

Depreciation = the allocation of an asset’s cost over its useful life

Amortisation = the gradual expense of intangible assets over time

It provides a measure of a company’s core profitability without being skewed by their financial structure (debt or equity financing) or accounting adjustments.

Essentially, EBITDA strips away the costs of financing (interest), government taxes, and non-cash accounting charges (depreciation and amortisation), giving a clearer picture of how profitable a company’s core operations are.

For example:

A company with a lot of debt will likely have high interest expenses.
A company in a high-tax area will pay more taxes than one in a low-tax area.
A manufacturing firm might have large depreciation costs due to expensive equipment investments.

EBITDA ignores these factors to provide a pure view of financial performance.

What is EBITDA Margin?

Now that we understand EBITDA, we can look at what EBITDA margin is.

EBITDA Margin expresses EBITDA as a percentage of revenue, indicating how much of each £1 of revenue is retained as operational profit before interest, taxes, depreciation, and amortisation.

EBITDA Margin Formula

The formula to calculate EBITDA margin is:

EBITDA Margin = (EBITDA / Revenue) × 100

Example EBITDA Margin Calculation

Let’s now look at three examples of EBITDA margin calculations:

Example 1 – EBITDA Provided

Imagine a company has the following financial data:

Revenue	£1,000,000
EBITDA	£250,000

Using the formula:

EBITDA Margin = (EBITDA / Revenue) × 100

EBITDA Margin = (250,000 / 1,000,000) × 100 = 25%

This means that for every £1 of revenue, the company earns £0.25 in EBITDA.

Example 2 – Calculating EBITDA from Revenue

Let’s now look at a slightly more complex example, where we will also work out the EBITDA from the following financial data:

Revenue	£250,000
Cost of Goods Sold	£150,000
Selling, General & Administrative Expenses (SG&A)	£20,000
Interest Expense	£10,000
Taxes	£16,000
Depreciation/ Amortisation	£5,000

First, we need to calculate EBITDA, using the formula:

EBITDA = Revenue – Cost Of Goods Sold – SG&A

EBITDA = £250,000 − £150,000 − £20,000 = £80,000

So, the EBITDA is £80,000.

Note: EBITDA is earnings before interest, taxes, depreciation and amortisation, so those metrics can be ignored for this calculation.

Now we can calculate the EBITDA Margin:

EBITDA Margin = (EBITDA / Revenue) × 100

EBITDA Margin = (£80,000 / £250,000) × 100 = 32%

This means the company generates 32% of its revenue as EBITDA.

Example 3 – Calculating EBITDA from Net Income

Let’s walk through an example where we are given the Net Income and the following financial data:

Revenue	£150,000
Net Income	£30,000
Interest Expense	£10,000
Taxes	£5,000
Depreciation	£3,000
Amortisation	£2,000

To calculate EBITDA from Net Income, we use the formula:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA = £30,000 + £10,000 + £5,000 + £3,000 + £2,000

So, EBITDA = £50,000.

Now that we know the EBITDA number, we can calculate the EBITDA margin:

EBITDA Margin = (EBITDA / Revenue) × 100

EBITDA Margin= (£50,000 / 150,000) × 100 = 33.33%

This means that the company generates 33.33% of its revenue as EBITDA.

Why is EBITDA Margin Important?

EBITDA margin is important for several reasons:

Measure of Operational Efficiency

The EBITDA margin highlights how well a company controls its operating costs.

A higher margin means the company is better at generating profit from its core business activities, with lower costs relative to its revenue.

Comparability

Since EBITDA excludes interest, taxes, and non-cash expenses, it creates a level playing field for comparing companies.

This allows for more accurate comparisons, as it focuses purely on operational performance, without external financial factors.

Insight into Profitability

The EBITDA margin reveals what portion of a company’s revenue is left after covering operating costs, but before considering taxes, interest, or depreciation.

Companies with higher EBITDA margins typically have more financial flexibility and are better equipped to handle financial challenges.

How to Interpret EBITDA Margin

Now that we know how to calculate EBITDA margin, let’s look at how to interpret the results.

High EBITDA Margin

A high EBITDA margin indicates that a company is good at converting a higher portion of revenue into profit.

For example, a software company with a 60% EBITDA margin likely has low variable costs and high scalability.

This type of business model is attractive to investors because the company keeps a significant portion of its revenue as profit.

Low EBITDA Margin

A low EBITDA margin might be a sign of inefficiencies or a business model with thin margins.

For example, a grocery chain with a 5% EBITDA margin might be typical as they operate in a highly competitive and low-margin industry.

Investors would need to determine whether the low margin is normal for the industry or a sign of inefficiency.

Limitations of Using EBITDA Margin

While EBITDA margin is a useful metric, it’s not without limitations:

Excludes Debt Costs and Taxes

EBITDA does not account for interest expenses or taxes, and therefore doesn’t reflect the actual financial obligations of a company.

Companies with a large debt liability may appear more profitable than they actually are when purely looking at EBITDA margin.

Ignores Capital Expenditures (CapEx)

Depreciation and amortisation are excluded, but these often represent significant capital investments.

For capital-intensive industries such as oil and gas, EBITDA margin can overstate profitability.

Not a Measure of Cash Flow

EBITDA does not equal cash flow.

A company with strong EBITDA but poor cash flow may be in financial stress and struggle to meet their obligations.

What is a Good EBITDA Margin by Industry?

A “good” EBITDA margin depends on the industry and company context, but in general:

EBITDA Margin (%)	Interpretation
Above 20%	Strong operational efficiency and profitability.
10% – 20%	Decent profitability, common in many industries.
Below 10%	Potential issues with cost management or low pricing power.

Industries with lower operational and capital expenditures (like software and financial services) tend to have higher EBITDA margins, while sectors with high raw materials, labour, and maintenance costs (like retail and manufacturing) typically experience lower margins:

Technology and Software: Often above 40%, driven by scalability, low variable costs, and high margins in digital services.
Retail and Consumer Goods: Typically 5 – 15%, due to intense competition and high operating expenses like inventory and distribution.
Energy and Utilities: Ranges from 15 – 35%, influenced by fluctuating commodity prices, high capital expenditures, and regulatory factors.
Manufacturing: Generally 5 – 15%, with low margins due to high raw material, labour, and equipment maintenance costs.

When analysing EBITDA margin, it’s crucial to compare it against peers within the same industry.

Case Study: Comparing Two Companies

Consider two companies in the same industry:

Metric	Company A	Company B
Revenue	£5,000,000	£2,500,000
EBITDA	£1,250,000	£750,000
EBITDA Margin (%)	25%	30%

Company A generates significantly more revenue and EBITDA, indicating a larger market presence or scale.

However, Company B is smaller in size, but has a higher EBITDA Margin, showing it is more efficient at turning revenue into profit.

Both companies have strengths, but the choice depends on investment goals:

Company A offers scale and growth potential, making it ideal for investors looking to benefit from a larger market presence and higher total profits.
Company B offers better operational efficiency, appealing to investors who prioritise profitability and cost-effectiveness over size.