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Profitability calculations. Measure of efficiency of a business

Coefficients EBITDA and EBITDA margin, EBIT and EBIT margin

Indicators: EBITDA (in Finnish, käyttökate) and EBITDA margin

This financial indicator measures the profitability of a business, assesses an organization’s ability to meet its obligations and used by financial analysts to determine the value of a business. The financial definition is the following:

EBITDA = earnings before interest, tax, depreciation and amortization

EBITDA can be calculated using Income Statement Data and by two different ways:

  • 1st Method: EBITDA = Operating Profit + Depreciation (tangible asset) + Amortization (intangible asset)


  • 2nd Method: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

In our example we have:

  • 1st Method: EBITDA = Operating Profit (EBIT) + Depreciation = 40 + 10 = 50


  • 2nd Method: EBITDA = Net Income + Interest + Taxes + Depreciation = 28 + 4 + 8 + 10 = 50

Another useful ratio is EBITDA margin, which determines a percentage of EBITDA against your company’s total revenue. It gives you an understanding whether your EBITDA result is good or not and indicates how much cash profit your business makes during the certain period of time. The formula for this financial ratio is the following:

  • EBITDA margin (%) = EBITDA / Total Revenue

In our example we have:

  • Total Revenue = Sales revenue + Other operating income = 200 + 50 = 250


  • EBITDA margin (%) = EBITDA / Total Revenue = 100 * 50 / 250 = 20 %

The idea is that EBITDA margin calculation's result have to be compared to others business’ financial performance within the same industry. The Advisory Council for Business Research in Finland (Yritystutkimusneuvottelukunta or YTN) has set guidelines for conducting financial statements analysis. According to these guidelines the recommended values for different industries are the following:

  • Shops 2 - 10%
  • Services 5 - 15%
  • Industry 10 - 25%

Thus, if we suppose that our hypothetical company X is a service company, then the result 20% will be quite good.

Indicators: EBIT (in Finnish, liikevoitto) and EBIT margin

These metrics will show you how profitable is your business. Using this indicator, you can compare the results of various companies, and even those one operated in different countries and tax jurisdictions, because taxes excluded from calculations and does not have an impact on the result. The financial definition is the following:

EBIT = earnings before interest and tax, EBIT = Operating Profit

EBIT can be calculated using Income Statement Data and by two different ways:

  • 1st Method: EBIT = Total Revenue – COGS - Expenses


  • 2nd Method: EBIT = Net Profit + Interest + Taxes

In our example we have:

  • 1st Method: EBIT = Total Revenue – COGS - Expenses = (200 + 50) – (50+10) – 70 – 60 – 10 – 10 = 40


  • 2nd Method: EBIT = Net Profit + Interest + Taxes = 28 + 8 + 4 = 40

The EBIT margin is the percentage relationship between EBIT and Total Revenue. The formula is:

\[ {EBIT\ margin} = {EBIT \over Total\ Revenue} * 100 \]

In our example we have:

\[ {EBIT\ margin} = {40 \over 200 + 50} * 100 = 16 \%\]

According to the Advisory Council for Business Research in Finland (Yritystutkimusneuvottelukunta or YTN) guidelines the recommended values are the following:

more than 10% Good
5 - 10% Satisfactory
less than 5% Weak

Thus, our result in 16% is a good one indicator of profitability of the company.

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