Understanding EBITDA margin

Definition

EBITDA margin is EBITDA divided by sales, shown as a percent. On the books, this is a ratio read from the Income Statement, not a GAAP line you debit and not a cash balance.

A wholesale bakery uses it to see how much of each sales dollar remains after operating leftover with depreciation and amortization added back. A 20 percent reading means twenty cents of that leftover on every dollar of sales.

It is not a Balance Sheet line. The statement computes it each period from this month's EBITDA and this month's sales.

Stay with the percent when you read it. The dollar leftover can rise while this percent falls, if sales grew faster than that leftover.

Where it shows up

P&L: Related to EBITDA divided by revenue.

Cash flow: Related to whether earnings quality is cash, which this ratio does not show.

See also: EBITDA · Revenue · Operating Margin

When you look at your Income Statement, this percent is not its own printed account. It is revenue and EBITDA, restated as a rate.

When the percent is high, the bakery kept more of each sales dollar after this add-back leftover. When it is low, flour cost, wages, or overhead ate more of each dollar, or the add-backs were small.

The Balance Sheet does not print this rate. The ovens, mixers, and unpaid mill bills behind the month sit there instead.

Operating margin is leftover after product cost and the costs of staying open, as a percent of sales. This rate adds depreciation and amortization back, so it is usually a larger percent.

Gross margin is leftover after product cost only. This rate sits further from that first leftover, because running costs have come out and two non-cash charges have been added back.

On the Statement of Cash Flows, this percent does not appear as a line. Whether the leftover turned into cash is a different story from this rate.

How it works

Take this period's EBITDA. Divide it by this period's sales.

Write the result as a percent. $30,000 of EBITDA on $150,000 of sales is 20 percent.

Use the same period for both numbers. Mixing last year's leftover with this year's sales will not tell you this month's rate.

Stay with this rate when you read it. A dollar leftover that grew because the bakery added a second shift is not the same story as a rate that held steady.

Operating income is the leftover before the two add-backs. Depreciation expense and amortization expense raise the numerator of this rate when they are added back.

Operating expenses still sit inside the leftover used here. A rent increase with flat sales will pull this percent down.

Do not treat a single catering weekend as the monthly rate. The percent uses the whole period's sales and the whole period's EBITDA.

After the month closes, this rate is part of the period's profit story. Next month starts the count again from zero.

A planned percent set next to the actual percent shows whether the bakery kept the rate it meant to keep. The gap is a reading of this rate, not a new account.

Do not treat a high rate as proof the bakery is flush with cash. Invoices can still sit open, and adding back depreciation does not collect from grocers.

Example

Batch Street Bakery, a wholesale shop, posts $150,000 of bread and pastry sales this month. EBITDA is $30,000 after operating leftover with depreciation and amortization added back.

Divide $30,000 by $150,000. EBITDA margin is 20 percent.

Last month the bakery posted $140,000 of sales and $28,000 of EBITDA, also 20 percent. Dollar leftover rose this month, but the rate held.

If oven depreciation rose $3,000 and sales stayed $150,000, EBITDA would be $33,000. The rate would rise to 22 percent even though cash did not.

A grocery order that adds $15,000 of sales at the same leftover rate will raise dollars and leave the percent near 20. A week of overtime on the night bake will lower the percent even if sales hold.

A second month at $165,000 of sales and $30,000 of EBITDA would be about 18 percent. Dollars held; the rate slipped because sales grew without more leftover.

Common mix-ups

EBITDA margin is not the same as EBITDA. EBITDA is the dollar leftover after the add-backs; this reading is that leftover as a percent of sales.

EBITDA margin is not the same as operating margin. Operating margin does not add depreciation and amortization back, so this rate is usually higher.

EBITDA margin is not the same as cash. A month can show a healthy percent while grocers have not paid and the mill bill is still open.

Related terms

• EBITDA: Earnings before interest, taxes, depreciation, and amortization.
• Adjusted EBITDA: EBITDA with owner or one-time items normalized out.
• Revenue: The total value of goods and services the business earned in a period.
• Operating Margin: Operating income as a percentage of revenue.
• Net Margin: Net income as a percentage of revenue.
• Gross Margin: Gross profit expressed as a percentage of revenue.
• Income Statement: A statement showing revenue earned and expenses incurred over a period, ending in net income.
• Budget Versus Actual: The comparison of planned amounts to what actually happened.