EBITDA-to-Sales Ratio

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EBITDA-to-Sales Ratio (EBITDA Margin)

What it is

The EBITDA-to-sales ratio, often called EBITDA margin, measures how much of each dollar of net sales remains as earnings before interest, taxes, depreciation, and amortization (EBITDA). It gauges operational profitability and how efficiently a company converts revenue into operating earnings.

Formula

EBITDA margin = EBITDA / Net sales

(Expressed as a percentage: multiply the result by 100.)

How to calculate

  1. Compute EBITDA:
  2. EBITDA = Net income + Interest expense + Taxes + Depreciation + Amortization
  3. Divide EBITDA by net sales (total revenue minus returns, allowances, and discounts).
  4. Convert to a percentage for easier comparison.

Example

If net sales = 1,000 and EBITDA = 200, then:
EBITDA margin = 200 / 1,000 = 0.20 → 20%

What it indicates

  • Operational efficiency: A higher margin means a larger portion of revenue remains after covering direct operating costs (COGS, SG&A).
  • Cash-generation proxy: Because it excludes interest, taxes, depreciation, and amortization, it highlights earnings available before financing and non-cash charges.
  • Benchmarking: Useful for comparing companies within the same industry and similar size.

Limitations and cautions

  • Not suitable for cross-industry comparisons — different industries have different cost structures.
  • Ignores financing costs — not appropriate for heavily leveraged companies because interest expense is excluded.
  • Excludes depreciation/amortization — can mask capital intensity and differing depreciation methods between firms.
  • Non-GAAP measure — EBITDA can be presented differently across companies; watch for adjustments and one-time items.
  • Not the same as cash flow — it omits capital expenditures and working capital needs, so it should not replace cash-flow analysis.

When to use

  • Compare operational profitability among peers in the same industry.
  • Screen companies for further analysis of operating performance.
  • Supplement, not replace, other metrics (net profit margin, free cash flow, return on capital) when assessing financial health.

Key takeaways

  • EBITDA margin shows operating earnings as a share of sales before financing and non-cash charges.
  • Higher margins suggest better cost control and operational efficiency.
  • Use it for same-industry comparisons and as one input among several—avoid relying on it alone.