Operating vs EBITDA margin
Operating margin is EBIT over sales. EBITDA margin adds D&A back first. On $100,000,000 of EBIT, $20,000,000 of D&A and $500,000,000 of sales, operating margin is 20 percent and EBITDA margin is 24 percent.
| Operating margin | EBITDA margin | |
|---|---|---|
| Formula | EBIT / sales. | (EBIT + D&A) / sales. |
| Teaching sheet | 20 percent on the first sheet. | 24 percent. The gap is 4 points of sales. |
| Fatter top line | Same $100,000,000 of EBIT on $1,000,000,000 of sales: 10 percent. | Same $120,000,000 of EBITDA: 12 percent. |
| Thinner EBIT | $50,000,000 of EBIT on $500,000,000 of sales: 10 percent, matching the second sheet. | $70,000,000 of EBITDA: 14 percent, which does not match the second sheet's 12 percent. |
| What it is not | Cash. EBIT has not paid tax, capex or working capital. | Cash, or a correction of EBIT. Adding D&A back is a choice. |
On this page
The add-back is the whole gap
EBITDA is EBIT plus depreciation and amortisation. On $100,000,000 of EBIT and $20,000,000 of D&A, EBITDA is $120,000,000. Over $500,000,000 of sales that is 24 percent. Operating margin on the same sheet is 20 percent. The gap is the $20,000,000 of D&A as a share of sales, 4 percentage points.
How operating margin works owns the 20 percent. How EBITDA margin works owns the 24 percent. EBIT against EBITDA is the add-back in dollars. The operating margin calculator prints both rates from one sheet.
D&A is already inside EBIT. Adding it back is how you reach EBITDA. It is not a second operating profit.
Two 10 percent operating sheets, two EBITDA margins
Keep EBIT at $100,000,000 and D&A at $20,000,000, so EBITDA is still $120,000,000. Raise sales to $1,000,000,000. Operating margin is 10 percent. EBITDA margin is 12 percent. The add-back did not shrink in dollars. It shrank as a share of a doubled top line.
Cut EBIT to $50,000,000 on $500,000,000 of sales. Operating margin is 10 percent, matching the second sheet. EBITDA is $70,000,000. EBITDA margin is 14 percent, not 12 percent. Ranking on operating margin ties those two sheets. Ranking on EBITDA margin does not. That is the whole reason both rates exist.
Neither rate is cash. EBITDA against free cash flow is that skip. This is educational material, not financial advice.
Worked examples
20 percent and 24 percent on the teaching sheet
EBIT is $100,000,000, D&A is $20,000,000, and sales are $500,000,000. What are the two margins?
- Operating margin: , which is 20 percent.
- EBITDA is EBIT plus D&A: , so $120,000,000.
- EBITDA margin: , which is 24 percent.
Operating margin is 20 percent. EBITDA is $120,000,000. EBITDA margin is 24 percent.
10 percent and 12 percent on \$1,000,000,000 of sales
Keep EBIT at $100,000,000 and D&A at $20,000,000. Sales are now $1,000,000,000. What are the two margins?
- Operating margin: , which is 10 percent.
- EBITDA is still $120,000,000.
- EBITDA margin: , which is 12 percent.
Operating margin is 10 percent. EBITDA is still $120,000,000. EBITDA margin is 12 percent.
10 percent operating, 14 percent EBITDA
EBIT is $50,000,000, D&A is $20,000,000, sales $500,000,000. What are the two margins?
- Operating margin: , which is 10 percent.
- EBITDA: , so $70,000,000.
- EBITDA margin: , which is 14 percent.
Operating margin is 10 percent. EBITDA is $70,000,000. EBITDA margin is 14 percent.
Common questions
Why is EBITDA margin wider than operating margin?
Because D&A is added back. On the first sheet the $20,000,000 of D&A is 4 points of sales, so 20 percent becomes 24 percent.
Is EBITDA margin cash?
No. It has not paid tax, capex or working capital. The $120,000,000 is an add-back, not a cheque.
Can two sheets share an operating margin and not an EBITDA margin?
Yes. The second and third sheets both print 10 percent operating margin. EBITDA margins are 12 percent and 14 percent. D&A as a share of EBIT is the difference.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.