Transparent method
The formula
Worked example
Example inputs
How to interpret the result
EBITDA margin shows how much of each sales dollar is left as operating profit before interest, tax, depreciation and amortization. On $5 million of revenue and $750,000 of EBITDA, the margin is 15 percent, and at a multiple of six times, the implied enterprise value is $4.5 million. The multiple drives that value far more than the margin does, and multiples vary widely by industry, growth and size.
Before you rely on it
What to check
Normalize the EBITDA for one-time items and the owner's own pay before you apply a multiple. A buyer will adjust for them, and so should you.
The common error
Where people go wrong with EBITDA margin calculator
Treating EBITDA as cash flow. It leaves out capital spending, working capital and taxes, all of which take real cash.
Sensitivity evidence
How annual revenue changes the EBITDA margin
| Annual revenue | EBITDA margin | Implied enterprise value | Revenue less EBITDA |
|---|---|---|---|
| $4,000,000 | 18.8% | $4,500,000 | $3,250,000 |
| $4,500,000 | 16.7% | $4,500,000 | $3,750,000 |
| $5,000,000worked example | 15.0% | $4,500,000 | $4,250,000 |
| $5,500,000 | 13.6% | $4,500,000 | $4,750,000 |
| $6,000,000 | 12.5% | $4,500,000 | $5,250,000 |
Every input, tested
Which input moves the EBITDA margin most
| Input | Tested from | To | EBITDA margin at each end | Swing |
|---|---|---|---|---|
| Annual EBITDA | $675,000 | $825,000 | 13.5% to 16.5% | 3.0% (20%) |
| Annual revenue | $4,500,000 | $5,500,000 | 16.7% to 13.6% | 3.0% (20%) |
| Selected EBITDA multiple | 5.40× | 6.60× | 15.0% to 15.0% | none |
Two variables at once
EBITDA margin by annual revenue and annual EBITDA
| Annual revenue \ Annual EBITDA | $600,000 | $750,000 | $900,000 |
|---|---|---|---|
| $4,000,000 | 15.0% | 18.8% | 22.5% |
| $4,500,000 | 13.3% | 16.7% | 20.0% |
| $5,000,000 | 12.0% | 15.0% | 18.0% |
| $5,500,000 | 10.9% | 13.6% | 16.4% |
| $6,000,000 | 10.0% | 12.5% | 15.0% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Annual revenue | $5,000,000 |
| Annual EBITDA | $750,000 |
| Selected EBITDA multiple | 6.00× |
| EBITDA margin | 15.0% |
| Implied enterprise value | $4,500,000 |
| Revenue less EBITDA | $4,250,000 |
Where the inputs come from
Annual revenue and annual EBITDA come from the income statement. EBITDA adds interest, taxes, depreciation and amortization back to net income, or equivalently starts from operating income and adds depreciation and amortization. Use adjusted EBITDA if you want to remove one-time items, and say so. The selected multiple is for the implied enterprise value: use one from recent transactions in your industry.
When the result stops applying
EBITDA ignores capital spending, working capital needs and taxes, so a business can have a strong EBITDA and weak cash flow if it spends heavily on equipment. It is not a measure under accounting standards, and definitions differ. Multiples vary widely with growth and risk, so treat the implied value as a rough guide.
What to compare it with
Value the business more fully with the EBITDA multiple valuation and discounted cash flow calculators. The operating margin and profit margin pages show profit after depreciation and interest. Return on invested capital checks how well the capital earns.
People also ask
Frequently asked questions
What is a good EBITDA margin?
It varies by industry: software and pharma can exceed 30%, while retail and distribution may be 5% to 10%. Compare with similar companies.
Why do buyers like EBITDA?
It strips out financing and accounting choices so operating performance can be compared across companies and used with a multiple for pricing.
What does EBITDA leave out?
Capital expenditures, working-capital changes, interest and taxes, all of which take real cash, so it can overstate what the owners can take home.