If you run a business or own a company, then you probably want to gauge its operational efficiency every now and then. This is where our EBITDA margin calculator comes in! The EBITDA is one of the most popular metrics in business today, which is why every business owner or manager should calculate it from time to time.
Our EBITDA calculator allows you to understand the health of a business. This calculator is not only an essential tool for business owners or managers, but it is also useful for investors and financial analysts. With this amazing tool, you will be able to quickly evaluate the operational efficiency of the company and go from there.
That’s why we will review the EBITDA calculator in this article. Besides, we will cover what it stands for, how it is used, why it is important, and how it is calculated. To help you understand how to compute EBITDA, we’ll provide an example in addition to the formula itself. Continue scrolling to discover more!
What is EBITDA?
EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s profitability that takes into account the company’s operating costs. As a matter of fact, it’s intended to gauge the company’s operating profit prior to depreciation and amortization as well as the deduction of interest and taxes.
How is it used? EBITDA is often used by analysts to determine how much a company can afford to pay in dividends because it excludes taxes and other expenses. It is also used by investors when they want to estimate the amount of cash flow available to pay dividends or to repay debt. So, it’s used to compare the operating profits or profitability of companies based on information on their basic activities.
This useful indicator enables us to estimate the company’s real capabilities. It also lets us compare the profitability of different companies, providing that they don’t have the same financial strategy or tax system. Therefore, the tax systems and financial strategies of the companies are omitted when calculating this metric.
EBITDA Margin – What Is It?
Now that you know what EBITDA is, it’s time to see what EBITDA margin represents and how it is used today. This method is used to analyze the operating proficiency of companies. Considering that EBITDA doesn’t factor in depreciation, amortization, interest, and taxes, this metric represents the ‘pure’ operating efficiency.
In fact, the EBITDA margin is a key financial ratio that measures the profitability of a company. It is calculated by dividing EBITDA or a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by its total revenue. This margin is usually expressed as a percentage.
How to interpret it? The higher the EBITDA margin, the more profitable the company. A high EBITDA margin means that the company can pay off its debts and still have money left over to reinvest in itself or distribute to shareholders as dividends. Generally speaking, the companies that have bigger operational efficiency feature a higher EBITDA margin.
Once you’ve calculated the EBITDA margin for two or more companies, you can easily compare them and determine which investment option is better. This is of great importance for investors. It goes without saying that they will want to choose the company that boasts a higher margin. However, investors should not rely solely on this calculator. They need to combine it with other tools, such as price-earnings ratio, EBIT, and sales ratio calculators for the best results.
How to Calculate EBITDA Margin?
Before calculating this margin, you need to compute EBITDA first. EBITDA can be calculated by subtracting an entity’s interest expense, taxes, depreciation, and amortization expenses from its earnings before these items are calculated. The EBITDA formula is as follows:
EBITDA = operating profit + depreciation expense + amortization expense
Now that you have calculated EBITDA, you will also need to know the total revenues of the company. Total revenues are the total amount of money that is generated by a business in a given period of time. This can be calculated by adding up all the revenue generated in that period, subtracting any costs incurred, and then dividing the result by how many units were sold.
Total revenues are important because they help businesses to understand how much money they make and how much they need to spend on things like marketing or wages. It also helps them to understand if their prices are too high or too low.
Have you calculated total revenues? Great! You are now ready to determine the EBITDA margin. Use the formula below:
EBITDA margin = EBITDA / Total revenues
For example, if total revenues are as high as $100,000 while EBITDA is equal to $53,000, the calculation will be as follows:
EBITDA margin = 53,000 / 100,000
EBITDA margin = 0.53
So, in our example, the EBITDA margin is 0.53 or 53%.
EBITDA Isn’t Disclosed: How to Compute It in This Case?
What if EBITDA isn’t disclosed? While companies are not obligated to disclose EBITDA, this doesn’t mean you shouldn’t consider building it up as well. Here are the guidelines and steps to follow:
- Step 1: First, you need to check the operating income of the company in question. This information can be found in the company’s income statement. It should be regarded as EBIT.
- Step 2: Next, the expenses in amortization and depreciation should be extracted from the CFS (cash flow statement). A cash flow statement is one of those significant financial statements that a company prepares. It summarizes the sources and uses of cash during a period of time.
- Step 3: At this stage, you will need to calculate EBITDA. This can be done by adding back amortization and depreciation to the EBIT value.
- Step 4: Lastly, you should calculate the EBITDA margin using our calculator or the formula mentioned above (EBITDA margin = EBITDA / Total revenues).
As you can see, the EBITDA margin plays an important role in analyzing operation efficiency. The calculation is quite simple. Once you’ve obtained total revenue and EBITDA from the income statement, the EBITDA should be divided between total revenue. Multiply the result you get by 100 because it should be expressed as a percentage. That’s it!