What is EBITDA Ratio?

EBITDA Ratio, also called EBITDA Margin, is the percentage of Total Revenue that remains after covering operating expenses, excluding interest, taxes, depreciation, and amortization. It indicates the efficiency of a company’s core operations in generating earnings.

Why is EBITDA Ratio Important?

EBITDA Ratio is important because it:

• Highlights Operational Efficiency: Shows how effectively a company converts sales into operating earnings.
• Facilitates Comparisons: Allows comparison across companies and industries regardless of differences in capital structure or tax environments.
• Informs Valuation: Commonly used in valuation multiples (e.g., EV/EBITDA) to assess relative value and profitability.

How is EBITDA Ratio Calculated?

EBITDA Ratio is calculated using the formula:

EBITDA Ratio = (EBITDA ÷ Total Revenue) × 100

Where:

• EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization
• Total Revenue = Sales from goods or services

For example, if a company has $500 million in revenue and $150 million in EBITDA, its EBITDA Ratio is (150 ÷ 500) × 100 = 30%.

Additional Considerations

• Trend Analysis: Monitoring EBITDA Ratio over time reveals improvements or declines in operational performance.

• Adjusted EBITDA: Companies may adjust EBITDA for one-time items to present a normalized margin.

• Industry Benchmarks: Comparing against peers helps identify relative competitive strengths or weaknesses.