The EBITDA margin formula
The EBITDA margin is EBITDA divided by revenue, times one hundred: EBITDA margin = EBITDA ÷ revenue × 100. The EBITDA is earnings before interest, taxes, depreciation and amortisation — a rough proxy for the cash profit the business generates from its day-to-day work. The revenue is the sales the business made in the same period. A margin of 20.00% means twenty dollars of operating profit on every hundred dollars of sales. Try the numbers on the EBITDA margin calculator and it does the division for you.
Step 1: find the revenue
Start with the sales. The revenue is the top line of the income statement — the money the business took in from selling its goods or services, before any costs are taken off. Find it on the income statement. Here is the worked example: revenue of $500,000. The revenue is a flow, not a stock — it covers a year, a quarter, or whatever period the EBITDA covers, and the two must cover the same period, or the margin means nothing.
Step 2: find the EBITDA
Start with the company’s accounts. EBITDA is earnings before interest, taxes, depreciation and amortisation. Take the operating profit and add back the depreciation and amortisation, or take the net income and add back the interest, the taxes, the depreciation and the amortisation. Find the operating profit on the income statement and the depreciation and amortisation on the cash flow statement. Here is the worked example: operating income of $70,000, plus depreciation of $20,000, plus amortisation of $10,000, gives EBITDA of $100,000. The depreciation and amortisation are added back because they are accounting charges, not cash the business paid out in the period.
Step 3: divide and read the answer
Divide the EBITDA by the revenue and multiply by one hundred. Here is the worked example: $100,000 ÷ $500,000 × 100 = 20.00%. So the business keeps $20 of operating profit on every $100 of sales. The answer is a percentage — write it as 20.00%. A higher number means the business keeps more of each sales dollar; a lower number means it keeps less.
Three worked examples
Example one — the headline numbers. A business has revenue of $500,000, and it throws off $100,000 of EBITDA a year. The EBITDA margin is $100,000 ÷ $500,000 × 100 = 20.00%. The business keeps $20 of operating profit on every $100 of sales.
Example two — how much EBITDA for a 25.00% margin? The same business has revenue of $500,000, and you want a 25.00% EBITDA margin. The EBITDA needed is 25.00% × $500,000 = $125,000. The business would need $25,000 more operating profit than it has today. The EBITDA margin calculator runs the reverses for you.
Example three — how much revenue for a 25.00% margin? The same business throws off $100,000 of EBITDA, and you want a 25.00% EBITDA margin. The revenue needed is $100,000 ÷ 25.00% = $400,000. Less revenue than that, and the same EBITDA is a bigger share of each sales dollar, so the margin rises above 25.00%.
One reverse to check your answer
Work the numbers backwards. A business has revenue of $500,000, and you want its EBITDA margin to reach 25.00%. The smallest whole-dollar EBITDA for the margin to reach the target is $125,000. A dollar less, and the EBITDA falls short of the $125,000 needed. The EBITDA margin calculator runs the reverses for you.
Revenue vs EBITDA
The revenue is what the business took in from sales — the top line of the income statement — while the EBITDA is what the business kept as operating profit before interest, taxes, depreciation and amortisation. Here is the worked example: revenue of $500,000 and EBITDA of $100,000 give an EBITDA margin of 20.00%. Find the revenue on the income statement, and the EBITDA in the income statement and the cash flow statement. The revenue is the sales, the EBITDA is the operating profit — and the margin is the share of the sales that stays as operating profit.
What a 20.00% margin means
A 20.00% margin means the business keeps $20 of operating profit on every $100 of sales — the business is keeping a fifth of each sales dollar as operating profit. Here is the worked example: $100,000 of EBITDA on $500,000 of sales is a 20.00% margin. A 20.00% margin is neither good nor bad on its own — the industry decides what that share means. Compare it with the same industry, not with the market as a whole. A margin in single digits can mean fierce competition or heavy operating costs — or a business that is spending to grow. A margin in the mid-twenties can mean strong pricing power or low operating costs — or a business that is under-investing in its own future.
What a 25.00% target means
A 25.00% target means the business keeps $25 of operating profit on every $100 of sales. Here is the worked example: the EBITDA needed for a 25.00% margin is $125,000 on $500,000 of revenue, and the revenue needed for a 25.00% margin is $400,000 on $100,000 of EBITDA. A 25.00% target is a bigger share than a 20.00% margin — the business keeps more of each sales dollar. Whether that share is fair depends on the pricing power and the costs the business runs with — a business with strong pricing power can justify a higher margin than one that competes on price.
Why EBITDA is not cash flow
EBITDA is not cash flow: it ignores the capital expenditure the business needs to keep running, so a high EBITDA margin built on a capital-hungry business flatters it — a business that must spend heavily on equipment can look profitable on EBITDA margin while its free cash flow is thin. It also ignores interest and tax, so a business loaded with debt can show strong EBITDA while its lenders take most of it. Use the EBITDA margin next to the free cash flow, and say which profit you used. Never mix them: a margin on operating profit against one on free cash flow is two different measures. Read the guide to the cash flow margin and the guide to enterprise value to EBITDA for the other side of the same accounts.
The EBITDA margin vs the profit margin
The profit margin is net profit divided by revenue — the share of each sales dollar left after every cost, including interest and tax — while the EBITDA margin is EBITDA divided by revenue — the share left before interest, taxes, depreciation and amortisation. The profit margin tells you what the business kept after everything; the EBITDA margin tells you what the business kept from its day-to-day work. Read the guide to the gross profit margin and the guide to the net profit margin and the guide to the operating margin to see where each margin sits.