Operating margin and EBITDA are two important measures in financial statements used to evaluate the profitability of a company.

Operating margin, expressed as a percentage, shows the portion of revenue remaining after operating expenses have been subtracted. Thus, it reflects the amount of profit a company makes for each dollar of revenue after subtracting production costs.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is earnings before interest, taxes, depreciation and amortization. It is expressed in dollars and shows the company’s profit without taking into account non-operating expenses.

Although these two measures are related, they provide investors and analysts with different information about a company’s financial health.

Operating profit margin

Operating profit margin is an important profitability indicator used by investors and analysts to evaluate a company’s performance. It shows how much of the company’s revenue is able to convert into profit after deducting operating expenses.

The operating profit margin calculation is based on two key components:

  • Revenue: Total income generated from the sale of goods or services. Revenue typically appears on the top line of a public company’s income statement.
  • Operating Profit: The amount of income remaining after deducting all operating expenses associated with the day-to-day operations of a company.

It is important to note that some expenses are not taken into account when calculating operating profit:

  • Interest on debt: the cost of servicing borrowed funds.
  • Paid taxes: mandatory payments to the state budget.
  • Investment gain or loss: Income or loss derived from investments in other companies or assets.
  • Unplanned losses: Gains or losses resulting from events outside the normal course of business of the company (for example, the sale of an asset).

In general, operating income includes any expenses necessary to maintain the business, such as rent, utilities, wages, employee benefits, and insurance premiums.

Studying operating profitability can help a company optimize costs and improve the financial position of the business.

What is the EBITDA indicator?

In addition to traditional indicators, the EBITDA indicator, or in other words, earnings before interest, taxes, depreciation and amortization, is used to assess the profitability of a company.

EBITDA allows you to analyze the financial result taking into account the characteristics of the capital structure, tax policy and depreciation methodology of a particular enterprise.

Unlike net profit, EBITDA does not take into account:

  • The cost of borrowing money, which is reflected as interest on the debt.
  • Tax payments depending on the jurisdiction and specifics of the company’s activities.
  • Non-cash expenses such as depreciation and amortization.
  • Depreciation is a method of allocating the cost of fixed assets over their useful life.

By subtracting depreciation and amortization expenses from revenue, you get operating income (EBIT), which is also called a company’s earnings before interest and taxes.

Thus, EBITDA gives a more accurate picture of the cash flow generated by the company and its ability to finance itself.

Difference between indicators

The key difference between EBITDA and operating income is the accounting for depreciation and amortization. These non-cash accounting expenses are excluded when calculating EBITDA.

EBITDA serves as an indicator focused on analyzing the financial position of the company and calculating dividends. Conversely, operating profit is an accounting measure that focuses on estimating expenses associated only with a company’s business activities.