What is EBITDA Margin?
EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a measure of a company’s operating efficiency and profitability. Companies widely use it to evaluate their financial performance and compare it with their peers.
EBITDA also provides a clear picture of a company’s core earnings to investors and creditors, as it eliminates the effects of financing decisions, tax policies, and depreciation methods. However, EBITDA has some limitations, as it does not account for the cash outflows required to maintain and replace the company’s assets.
Calculation Of EBITDA Margin
The EBITDA margin elucidates the amount of EBITDA a company generates per ₹100 of revenue. To compute the EBITDA margin, the following steps can be employed:
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Acquire Income Statement Data: Obtain pertinent figures such as revenue, cost of goods sold (COGS), and operating expenses (OpEx) from the income statement.
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Retrieve Non-Cash Items from Cash Flow Statement: Extract depreciation and amortization (D&A) along with other non-cash adjustments from the cash flow statement (CFS).
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Compute EBIT (Operating Income): Subtract COGS and OpEx from revenue to derive EBIT, also known as "operating income."
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Calculate EBITDA: Add back D&A and other non-cash adjustments to EBIT, resulting in the calculation of EBITDA.
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Determine EBITDA Margin: Divide EBITDA by the total revenue to ascertain the EBITDA margin.
Example of EBITDA Margin
In the second quarter of 2023, Bharti Airtel, a leading player in India's telecommunications sector, disclosed a consolidated revenue of INR 377.9 billion, reflecting a significant 21.1% year-on-year surge. At the same time, the consolidated EBITDA for the same quarter reached INR 197.4 billion (equivalent to US$2.4 billion), indicating an 18.9% year-on-year upswing.
As a consequence, the EBITDA margin for Q2 2023 was calculated at 52.24%, derived from the formula (197.4 / 377.9) × 100. This marks a substantial enhancement of 212 base points compared to the second quarter of 2022. In practical terms, this implies that for every INR 100 of revenue generated, Bharti Airtel realized INR 52.3 in operating income before accounting for interest, taxes, depreciation, and amortization.