EBITDA margin: This is how easy it is to calculate the value

How prof­itably is your company running its daily op­er­a­tions? To answer this question, many companies refer back to the return on sales: the re­la­tion­ship between the annual net profit and overall turnover. In this cal­cu­la­tion, however, different items are taken into account, which have no sig­nif­i­cance for the actual op­er­a­tions and therefore distort the result. With the EBITDA margin, you obtain a more realistic picture of the prof­itabil­i­ty of business op­er­a­tions in your company.

The acronym EBITDA is derived from the following for­mu­la­tion: "earnings before interest, tax, de­pre­ci­a­tion, and amor­ti­za­tion". This figure describes the per­for­mance of a company, whereby interest, taxes and de­pre­ci­a­tion on fixed assets and im­ma­te­r­i­al items are not included.

There are two ad­van­tages with this figure: on the one hand, it enables isolated con­sid­er­a­tion of the op­er­a­tional ac­tiv­i­ties of a company. The financial items that you exclude from the EBITDA have no direct effect on the success of the business op­er­a­tions. On the other hand, the differing taxation of companies often makes in­ter­na­tion­al com­par­isons difficult. If you leave these in­flu­ences out, companies in different countries can be compared more easily with one another.

On the other hand, EBITDA also has the following weakness: Since it does not record de­pre­ci­a­tion on assets, it is difficult to derive pre­dic­tions from it regarding the company's success. Pro­duc­tion resources, for example, have only a limited duration and have to be de­pre­ci­at­ed in value and later replaced. A company’s economic context is also con­stant­ly changing, and the company must respond to this with new in­vest­ments and the relevant de­pre­ci­a­tion. A company with a good EBITDA margin can certainly be pushed into the back­ground because it neglects the necessary in­vest­ments.

The EBITDA margin places the EBITDA in relation to the overall turnover: how does the income relate to the costs before taxes, interest and de­pre­ci­a­tion are offset? The per­cent­age value thereby gives in­for­ma­tion about the prof­itabil­i­ty of the company in its business op­er­a­tions since it shows how much of the sales received (money made from the sales of goods and services) is initially left over. Man­u­fac­tur­ing, sales and ad­min­is­tra­tion costs, for example, are related to the turnover.

In general, the objective of a company is to keep its EBITDA margin as high as possible, for this indicates the low costs of day-to-day business in relation to the turnover. The EBITDA margin therefore also plays a major role when it comes to making savings on running costs: To improve this margin, cost savings have to be made on pro­duc­tion, ad­min­is­tra­tion or staff, for example. The success of such savings is ul­ti­mate­ly expressed in the EBITDA margin and not nec­es­sar­i­ly in the profit.

Ul­ti­mate­ly, the EBITDA margin can also be used for an industry com­par­i­son. Different average EBITDA margins can be deployed within various in­dus­tries. If you know these, you can easily estimate how prof­itably your own company is operating.

In cal­cu­lat­ing this, you use a full annual turnover. All revenue received from the sale of goods and/or services are relevant for this. The EBITDA includes these revenues as well as all expenses for the same period that can be directly applied: Material costs, man­u­fac­tur­ing costs, rental and leasing costs, energy costs, ad­min­is­tra­tion and sales costs, etc. On the other hand, interest receipts and expenses, as well as taxes and de­pre­ci­a­tion of any kind, are excluded.

For the EBITDA margin to come out high, the EBITDA must be high in relation to sales. This means that the costs taken into account are com­pa­ra­bly low. This is precisely why the EBITDA margin serves as a figure for the impact of savings with regard to operating costs.

Despite the lower turnover, the second company has a higher EBITDA margin. This shows that the costs arising in the business op­er­a­tions are com­pa­ra­bly lower. The company therefore operates more prof­itably day to day.

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