What do EBITDA and EBITDA margin of a company mean to an investor?

With companies reporting their December 2023 quarter results, investors and analysts are tracking firms' performance and eyeing the best stock to invest in. Several metrics help investors comprehend a company's financials, one of them being earnings before interest, tax, depreciation, and amortisation, or as they call it in the market language, EBITDA. 

Why should investors know about EBITDA? 

EBITDA is sometimes reported in quarterly earnings press releases and is frequently cited by financial analysts and investors. It helps in analysing a company's operating profitability, which is the money left after paying all business costs but before paying tax.

Ignoring tax and interest expenditures allows analysts and investors to see the operational success of a company, and as depreciation and amortisation are non-cash expenses, EBITDA also gives information about estimated cash production and operations that are managed for capital investments.

Generally, higher EBITDA indicates stronger profitability. Comparing EBITDA with the company's peers and historical performance is essential for a meaningful assessment.

Conversely, a decrease in EBITDA may indicate low profitability and cash flow problems.

How to calculate EBITDA? 

EBITDA is calculated by adding interest expenses, taxes, depreciation, and amortisation to net income.

Every company's financial statement includes earnings (net income), taxes, and interest, whereas depreciation and amortisation statistics are typically found in the notes to operating profit or on the cash flow statement.

The formula for EBITDA:

Revenue – expenses (excluding tax, interest, depreciation, and amortisation)= EBITDA

What is the EBITDA margin? 

The EBITDA margin is an accounting tool for calculating a company's more realistic profit picture. EBITDA margin is calculated by dividing EBITDA by total revenue.

EBITDA margin = EBITDA/Total Revenue

The EBITDA margin indicates how much operating expenses reduce a company's gross profit. Finally, the bigger the EBITDA margin, the less risky a company is viewed financially. 

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