Investing for Beginners , investing

EBITDA margin is a profitability margin that shows how much of EBITDA earns company’s revenue relatively. The EBITDA margin is the best for profitability comparison of the companies if you want to measure effectiveness, because it ignores main differences in accounting policy and capital structure. 

The EBITDA margin usually is much higher than the net profit margin and fluctuates less. Normal EBITDA margin may be in range from 10% to 50% depending on industry. Usually businesses that need a lot of investments have higher EBITDA margin.

There is only one case when EBIT margin is better than EBITDA margin for profitability comparison. That case if for construction companies, because in construction industry is very popular to rent equipment but not to buy it. If one company will buy equipment but another will rent it, then the first one will have higher EBITDA margin but it’s not necessary means that the first one is more successful. 

EBITDA margin is mostly used for comparison of company’s profitability to competing businesses. But also EBITDA margin is especially useful to get known about the market sector and the profitability of it. Normally sectors that have high EBITDA margins are hard to enter: telecoms, utilities, pharmacy and other similar sectors.

EBITDA margin (as well as EBITDA) is not used for financial companies. Also you could consider using OIBDA instead of EBITDA.

EBITDA Earnings

The name of EBITDA explains what it is: earnings before interest, taxes, depreciation and amortization. However, it may sound complicated for those who reads about it for the first time. EBITDA has gained its popularity because of practical meaning. EBITDA is not affected by company’s capital structure and depreciation, which is not a very stable ratio, and taxes that may be different in every country. That makes EBITDA the most comparable ratio.