Operating margin and EBITDA – which stands for “earnings before interest, taxes, depreciation and amortization” – are two measures of a company’s profitability. While related, they provide different profit measurements and different points of financial analysis for a company.
Operating margin, also referred to as operating profit margin, is one measure of the company’s profit level. It is shown as a percentage of total sales revenue with all costs of doing business factored into the equation except for taxes, interest, profit or loss from investments, and any extraordinary gains or losses from events outside of the company’s regular business dealings, such as selling real estate or buildings. Costs included in figuring the operating margin include wages and benefits for employees and independent contractors, administrative costs, the cost of parts or materials required to produce items the company sells, advertising costs, and depreciation and amortization. Examining the operating margin helps companies analyze, and hopefully reduce, variable costs involved in conducting their business.
Although the figures used for calculating operating margin and EBITDA somewhat overlap, EBITDA is commonly considered more closely related to net profit margin, because the net profit provides the base number from which EBITDA is calculated. Net profit is the bottom-line calculation for a company’s profitability, as it includes all of the company’s costs and expenses, including taxes, interest, and one-time or extraordinary expenses, figures that are not included in the calculation of operating profit. EBITDA represents the net profit amount with taxes, interest, depreciation and amortization added back to that amount. Thus, EBITDA includes both items usually categorized under net profit (taxes and interest) and items usually categorized under operating profit (depreciation and amortization). The EBITDA figure is helpful in comparing the net profitability of different companies by factoring out of the comparison decisions related to financing and accounting.