EBITDA Margin

Think of margin as a sidekick. Profit has a margin. So does EBITDA.

Margin compares a company's bottom line to its top line. For profit margin, it's basically how much of the company's revenue turns into profit. The margin is determined by dividing the company's profit figure by its revenue figure.

EBITDA margin works the same way.

EBITDA is a special way of determining a company's bottom line that leaves out certain items. Specifically, the term stands for "Earnings Before Interest, Taxes, Depreciation, and Amortization."

To figure out the margin, use the same formula as with regular vanilla profits: divide EBITDA by revenue. That gives you the EBITDA margin.

The higher the number, the better. A high number means that a larger portion of revenue are generating profit, or EBITDA (and a smaller percentage is getting eaten up by pesky expenses, like salaries and materials).

Related or Semi-related Video

Finance: What is Debt-to-EBITDA?58 Views

00:00

finance a la shmoop what is the debt to EBITDA ratio alright people well

00:08

anytime you see that to in there a pretty good chance we're dealing with a [Person writes ratio on chalkboard]

00:11

ratio and yeah this one's a ratio that compares what a company owes in debt to

00:17

its EBITDA or earnings before interest taxes depreciation and amortization

00:21

otherwise lovingly known on Wall Street as cash flow like the cash it produces [Cash falls from sky]

00:27

alright well the numbers used by bankers and investors to see how leveraged is a

00:30

company is and evaluate its creditworthiness the higher the number

00:34

the more likely it is that a company will struggle to pay up its debt.. Well,

00:39

let's use a couple of practical examples here, a demo;

00:44

if your friend Deb wants

00:46

to borrow five grand from you maybe Deb just doesn't want her pops to

00:50

know she you know dented the car she's not the best driver in the world and

00:54

Deb's a two on the friend reliability scale like you totally trust her and [Deb moving side to side on reliability scale]

00:58

she's a lawyer and makes hundreds of thousands of dollars a year suing people

01:03

for stuff all right well after living expenses she has cash flow personally of

01:08

some fifty grand a year that she socks away in a mattress you know what she [Deb places cash under mattress]

01:12

sleeps on so you'd go ahead and make the loan to Deborah and you'd have no doubt

01:17

that she has the dough to pay you back your five grand the debt to EBITDA in

01:22

this situation five grand over 50 grand or one to ten or 0.1 very low debt to

01:30

EBITDA ratio there very safe bet she'll pay you back your five grand

01:35

well this logic applies to loaning companies money as well the five grand [Man discussing loans outside Amazon building]

01:39

in debt is quote money good unquote and you don't lose sleep over loaning them

01:43

that money if they have good credit and low debt to EBITDA doubt ratios right they

01:48

have more than enough cash flow to cover that debt well so then what's bad debt

01:52

to EBITDA ratio like what does that look like well it's when you have debt

01:55

of more than three or four five times cash flow some companies go even higher [Bad debt-to-EBITDA ratio example]

01:59

so if whatever dot-com has 50 million dollars in cash flow but three hundred

02:05

million dollars in debt that's a really high debt to EBITDA ratio of three

02:10

hundred over fifty or six to one or you just say

02:13

6x if that debt costs a 8% a year to rent well then the total cost just to pay

02:19

interest is 24 mil or almost half of all the company's cash flow for the entire

02:25

company and remember they got to be paying down the principal as they go [Whatever.com's cash flow debt]

02:28

along as well so it's a huge percentage of their cash flow just goes to the bank

02:32

should whatever com stumble and maybe you don't know interest rates go up as

02:36

well well then things could get ugly really fast and yes even uglier than [Deb driving a car in a storm]

02:40

this so yeah you want low debt to EBITDA ratios not high ones unless you're a

02:45

real dice roller there [Debt laid in hospital bed]

Find other enlightening terms in Shmoop Finance Genius Bar(f)