How to calculate the EBITDA margin formula
Earnings before interest, taxes, depreciation and amortisation (EBITDA) is the most common measure to assess earnings. The EBITDA margin formula divides the EBITDA figure by revenue. The formula is as follows:
EBITDA / revenue
Businesses use assets to produce revenue. Depreciation expenses are posted as tangible (physical) assets as you use them. Premium, for example, owns a $10,000 machine with a useful life of 15 years. The machine’s cost is reclassified to a depreciation expense as Premium uses the machine to produce revenue.
Similarly, amortisation expenses are posted when you use an intangible asset in the business. Let’s assume that Premium buys a patent on a manufacturing process and the patent has a remaining life of 20 years. Premium will reclassify the cost of the patent to an amortisation expense over 20 years.
The EBITDA formula adds the back interest, tax, depreciation, and amortisation expenses. Using the EBITDA margin formula, Premium’s margin is 22.1%. The formula is as follows:
($138,000 + $18,000 + $46,000 + $20,000) / $1,002,000 = 22.1%
The plumbing example above illustrated the importance of earning a return on the assets you purchase and company equity. The last three ratios measure the rates of return.