Introduction
The EBITDA margin is an estimation of an organisation’s operating gains in terms of percentage of its overall revenues. The term ‘EBITDA’ stands for earnings before interest, taxes, depreciation, and amortisation. Gauging the EBITDA margin will allow analysts and investors to compare the performance of companies operating in the same sector, regardless of their size.
The following alternatives are used by the analysts and investors to refer to the EBITDA margin, which will help them in understanding the profitability of a company:
EBITA, the earning of a company before interest, taxes, and amortisation
EBIT is earnings prior to interest and taxes, and it is also known as operating margin
Formula
The formula to calculate the operating profitability is a fairly simple one. EBITDA or EBITA or EBIT is obtained by the ratio of total revenues to operating profitability.
For example, a business having its revenues amounting to Rs 3,25,000 and EBITDA of Rs 1,50,000 would have its EBITDA margin at 3,35,000/1,50,000 = 46.1%.
Application of EBITDA
There isn’t a single investor or analyst who would argue that a company’s interest, taxes, depreciation, and amortisation are not going to matter. However, EBITDA will remove all these numbers so that they are able to focus only on the necessities, and they are cash flow and profitability.
On doing this, the investors and analysts will make it simpler for themselves to compare the profitability of more than two companies operating in the same sector, regardless of their size. If this is not done, then the numbers may seem skewed in the short-term.
The EBITDA margin is and indicative of the operating cash generated in exchange for the revenues earned.
