Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
Formula
Description
Measures profitability before the impact of financing decisions, tax jurisdiction, and depreciation policy. It is widely used in M&A and private equity because it approximates cash-generating ability before capital allocation decisions.
Interpretation
Above 20% is generally strong. Useful for comparing companies across different tax jurisdictions and capital structures. Critics argue EBITDA ignores real costs (capex, taxes), so always pair with FCF-based metrics.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
The percentage of revenue converted to operating cash flow before capital expenditures. Compare to operating margin: when OCF margin is much higher, the company has favorable working capital dynamics that boost cash generation.
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