EBITDA Margin Vs Operating Margin: What's the Difference | Motilal Oswal
EBITDA Margin Vs Operating Margin: What's the Difference | Motilal Oswal

EBITDA Margin Vs Operating Margin: What's the Difference

Before an investor invests in the company’s stock, they take a peek at the performance of that company. Later, they check the profitability of the company. Based on the past records of the company, investors take their next step. And that is investing in the stock of the company. All these can be analysed with the help of two indicators - EBITDA margin and operating margin. If you are looking at the possibility of online trading, it might be easier said than done. So, here we walk you through the indicators and their differences.

  • EBITDA margin explained

EBITDA is nothing but earnings before interest, taxes, depreciation, and amortization. This is calculated to know the profitability and financial stability of the company, where an investor can compare with other companies based on their investment preferences. 

EBITDA margin : EBIT + Depreciation + Amortization ÷ by total sales (Revenue) × by 100. If the EBITDA percentage margin is higher, then the company is working efficiently, and vice-versa

  • What is operating margin?

Operating margin is another profitability ratio to measure the financial stability of the company post operating and non-operating expenses. The operating income of the business is the value after subtracting the operating expenses from the sales revenue. Some of the operating expenses are wages, salaries, and administrative costs. However, expenses like depreciation, interest on loan, taxes, and amortization won’t be included while computing operating income. Any expenses outside the purview of business operations aren’t supported for operating income calculation.

After getting operating income, the next step is finding the revenue of the business. Also known as sales receipts or net sales, it’s the income received from selling the goods of the company. Don’t forget to deduct sales returns, sales discounts, and sales allowance to get the net sales for that specific period. Now that you have net sales or revenue and operating income, the final step is to find the operating margin. 

Operating Margin: Operating Income or Operating Profit/Net sales or revenue × 100 

  • EBITDA Margin Vs Operating Margin

EBITDA margin and Operating margin are the most preferred metrics by investors to check the company’s profitability and their financial well-being. Yet, there are some minor differences between the two metrics, which we bring to your attention.

1) EBITDA’s major focus is on the overall profitability. For operating margin, the focus is not just on profit made on each rupee spent. Operating margin also tells us how much money is in hand to pay the external expenses that take place outside the business operations.

2) EBITDA is used at the time of mergers and acquisitions, whereas operating margin is used to analyze the performance between companies and suggest the right investment options to stock your money.

3) EBITDA is a non-GAAP measure, whereas operating is a GAAP measure, which means, if the company is not doing great, they have the leeway to exclude non-GAAP earnings from the book, and only exhibit the GAAP records to the investors. 

Conclusion

EBITDA margin & Operating margin have their fors and againsts. If you are looking for in-depth analysis, operating margins data will suffice. Even if you go with both the metrics, make sure you compare apples to apples for an apt outcome.

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