How EBITDA margin works

EBITDA margin asks what share of sales survives as EBIT plus depreciation and amortisation:

$$\text{EBITDA margin} = \frac{\text{EBIT} + \text{D\&A}}{\text{Sales}}$$

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.

The operating margin calculator on this page prints both. How operating margin works owns the 20 percent. This page owns the 24 percent. Operating margin against EBITDA margin is the pair. EBIT against EBITDA is the add-back in dollars.

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. EBITDA margin is 12 percent. Operating margin is 10 percent.

The add-back did not shrink in dollars. It shrank as a share of a doubled top line. The first sheet's 24 percent was the same $120,000,000 of EBITDA on $500,000,000 of sales. Ranking those two sheets by EBITDA margin ranks the top line, not a change in the add-back pile.

How operating margin works follows the EBIT line down to 10 percent on this sheet. Both rates moved because the denominator doubled.

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 the second sheet's 12 percent.

D&A is a larger share of a thinner EBIT, so the add-back rate is wider. Ranking on operating margin ties those two sheets. Ranking on EBITDA margin does not. That is the whole reason this page exists.

How EV/EBITDA works puts this flow in a multiple's denominator. A margin is a share of sales. A multiple is a stock over a flow. They are not interchangeable.

It is not cash. EBITDA has not paid tax, capex or working capital. How free cash flow works is the five-line bridge. EBITDA against free cash flow is that skip as a table.

It is not operating margin. Operating margin has already deducted the $20,000,000 of D&A. Adding it back is a choice, not a correction of a mistake in EBIT.

It is not net margin. Interest and tax still sit below.

It does not know whether this year's D&A matches this year's maintenance capex. A firm whose assets last thirty years and a firm that replaces them every five can print the same EBITDA margin and a very different cash need. The $20,000,000 add-back on this sheet is an accounting allocation, not a cheque to replace the plant.

Type the D&A your sheet is using. Mixing a reported add-back with an adjusted peer is how one firm looks like two. EBIT and sales have to come from the same stretch of time. A year of sales against a quarter of EBITDA is not a margin.

It is not a cash figure, not an EV/EBITDA engine, and not a target of 24 percent. The three sheets are 24 percent on $120,000,000 of EBITDA over $500,000,000 of sales, 12 percent when sales are $1,000,000,000, and 14 percent on $70,000,000 of EBITDA (EBIT $50,000,000). This is educational material, not financial advice.