EBITDA margin: formula, worked example and what counts as good

EBITDA margin is earnings before interest, tax, depreciation and amortization, divided by revenue. It shows how much of each sales dollar is left from operations before the cost of the assets that produce it and the cost of financing them. A company with revenue of $48,000,000 and EBITDA of $7,680,000 has a 16.0% EBITDA margin.

The formula

EBITDA margin = EBITDA / Revenue

EBITDA (top-down) = Operating profit + Depreciation + Amortization

EBITDA (bottom-up) = Net income + Income tax + Interest + Depreciation + Amortization

The two routes give the same EBITDA when there are no other non-operating items between operating profit and net income, such as investment income, foreign exchange gains or a loss on selling an asset. When there are, take them out on the bottom-up route, or start from operating profit.

In Excel, with revenue in B2, operating profit in B3 and depreciation and amortization in B4:

=(B3+B4)/B2

The P&L lines you need

Take D&A from the cash-flow statement, not the income statement. Many companies have no D&A line on the face of the P&L: depreciation of factory equipment sits inside cost of goods sold, and the rest inside operating expenses. The cash-flow statement adds the full amount back in one line.

A worked example, both routes

One company, one fiscal year, in USD.

Top-down: operating profit of $5,280,000 plus D&A of $2,400,000 is $7,680,000. Bottom-up: net income of $3,300,000 plus tax of $1,100,000 plus interest of $880,000 returns operating profit of $5,280,000, because this company has no other non-operating items; adding D&A gives the same $7,680,000. Divided by revenue, 7,680,000 / 48,000,000 = 16.0%.

The levels above EBITDA, gross margin and contribution margin, are covered in gross margin vs contribution margin vs net margin, and the short definition of the first one is under gross margin.

Three companies compared

EBITDA margin and operating margin can rank the same companies differently. The gap between them is D&A divided by revenue, which depends on how much equipment and acquired intangible assets a business carries.

On operating margin the software firm leads and the manufacturer is last. On EBITDA margin the manufacturer leads. D&A is 12.0% of the manufacturer's revenue against 5.0% for the other two, so adding it back lifts the manufacturer past both. Neither ranking is wrong; they answer different questions. EBITDA margin says how much cash-like profit operations produce before replacing assets; operating margin says what is left after the assets wear out.

The check

Two identities prove the figure:

1. Both routes agree. Top-down and bottom-up EBITDA are both 7,680,000. If they differ, the difference is a non-operating item you have not removed, or D&A taken from the wrong statement.
2. EBITDA minus D&A returns operating profit. 7,680,000 − 2,400,000 = 5,280,000, the operating profit on the income statement. In margin terms, 16.0% − 5.0% = 11.0%.

For a group, a third check applies: EBITDA by entity or business unit must sum to group EBITDA, after intercompany charges are eliminated.

What is a good EBITDA margin

It depends on the industry, because asset intensity decides how big the D&A add-back is. Aswath Damodaran's margins by industry, using US company data as of January 2026, give these EBITDA/sales figures beside the pre-tax operating margin:

Telecom and utilities gain more than ten points from operating margin to EBITDA margin; software gains about three. That is why a cross-industry comparison misleads: a utility at 35% and a software company at 35% are not equally profitable once the networks and plants are paid for. Use a peer figure to check you are in the right range, then track your own margin month by month, where a two-point fall is a finding.

EBITDA is non-GAAP

EBITDA is not defined by US GAAP, so for a US public company it is a non-GAAP financial measure. Regulation G requires a company that discloses one to reconcile it to the most directly comparable GAAP measure, and in SEC filings Item 10(e) of Regulation S-K adds that the GAAP measure must be shown with equal or greater prominence. The SEC staff's non-GAAP compliance and disclosure interpretations say EBITDA used as a performance measure "should be reconciled to net income", which is the bottom-up route above.

Adjusted EBITDA adds back more items: stock-based compensation, restructuring, acquisition costs. The same interpretations warn that excluding "normal, recurring, cash operating expenses necessary to operate a registrant's business" can be misleading, and they treat a cost that occurs "repeatedly or occasionally, including at irregular intervals" as recurring.

For readers comparing with IFRS reporters: from January 1, 2027, IFRS 18 requires disclosure of management-defined performance measures, which will cover most EBITDA figures used in public communications.

Where it goes wrong

• Treating EBITDA as cash. It ignores capital expenditure, changes in working capital, interest and tax. A company with a 20% EBITDA margin can burn cash if it spends heavily on equipment or inventory.
• Comparing across industries. A manufacturer and a software firm with the same EBITDA margin carry very different asset bases, as the table above shows.
• Adjusted EBITDA that is not adjusted fairly. Costs labeled one-time or nonrecurring that come back every year are recurring, and adding them back inflates the margin.
• D&A from the income statement. When depreciation sits inside cost of goods sold, the P&L line understates it. Use the cash-flow statement or the notes.
• Leases. Under US GAAP (ASC 842) operating-lease cost is a single straight-line expense inside operating expenses, so it stays inside EBITDA. IFRS 16 puts nearly all leases on the balance sheet, so lease cost appears as depreciation and interest, both below EBITDA. A US company with large store or office leases shows a lower EBITDA margin than an otherwise identical IFRS reporter.

EBITDA by business unit

Group EBITDA margin hides the spread between units, and unit EBITDA is where definitions slip. Head-office costs allocated by revenue make a large low-margin unit look worse than it is; intercompany management fees and transfer prices move profit between units with no change in the business; and entities in other currencies need consistent rates before they add up, as covered in currency and multi-entity roll-ups. State the allocation rule once and keep it.

Covirage computes EBITDA and its margin by entity and month from the uploaded trial balance or ledger, with a stated definition, and its deterministic tools check that the units sum to the group. The external AI model explains the movements and never does the arithmetic. See FP&A reporting for the monthly reporting package, and ten board metrics for a sales-led company for where EBITDA margin sits in a board pack. For the gap between the two measures, see EBITDA vs operating income, and to compute gross, operating and net margin from your own figures, use the profit margin calculator.