As a financial consultant to business owners, I am often asked, “how does my business compare to others?” Whenever I hear this question I almost always direct the business owner to the only metric that is truly comparable from business to business.
EBITDA Margin is the metric, and it expresses the percent of Earnings Before Interest, Taxes, Depreciation and Amortization to total revenues. EBITDA is a measure of new cash flow generated by the business in a given period of time, usually one year or sometimes trailing twelve months. EBITDA Margin is the “percent” of total revenues represented by EBITDA. Stated another way, EBITDA Margin is the percent of each revenue dollar that ends up as new cash flow generated for the business.
This metric actually measures the effectiveness of your business model, and like most financial metrics, should increase over time if your business is operating more efficiently from year to year.
EBITDA margin for two distinct companies can actually be compared to see which business model is operating more efficiently. The greater the EBITDA margin, the more efficiently the business is creating new cash flow. And… the greater the valuation that will be assigned to the company.
And when the EDITDA margin is compared for the same business from year to year, it becomes readily apparent if the business is operating more efficiently from year to year.
So, if you want to know how your business compares to others, check out your EBITDA margin. Widely published for publicly traded companies, sought after by investors, and a key value driver for your business, EBITDA margin tells it all!
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