EBITDA Margin

What the EBITDA margin actually measures

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization — profit before interest, taxes, depreciation, and impairments. It is the most used (and most criticized) profitability indicator in modern finance. EBITDA margin = EBITDA / revenue × 100. The idea is to isolate the company's OPERATING profitability from its financing structure (interest), tax jurisdiction (taxes), and investment history (depreciation). Two companies with identical operations but different debt, different tax rates, and different machine ages should have the same EBITDA — but different net profit. This makes EBITDA useful for comparing companies 'as if' they were financed alike. Hexagon has EBITDA margin ~38%, Sandvik ~25%, Volvo ~13%. These numbers show operating profitability independent of liabilities and tax. EBITDA is also the standard metric for EV/EBITDA valuation (see V6).

💡 INSIGHT

EBITDA isolates OPERATING profitability. This is its strength — and its weakness. By removing depreciation, EBITDA ignores that machines wear out and must be replaced. For capital-intensive companies (telecom, industry) EBITDA is dangerously misleading.

Why EBITDA was created

📖 DEFINITION

EBITDA = Profit before interest, taxes, depreciation, and impairments. Usually calculated as Operating profit (EBIT) + Depreciation + Impairments. EBITDA margin = EBITDA / Revenue × 100.

EBITDA vs EBIT vs net profit — when do you use what?

Three result levels, three different purposes. EBITDA — operating profitability before capital structure. Use it to compare companies with different financing, in valuation multiples (EV/EBITDA), and to assess debt capacity. Good for SaaS, services, and companies with low reinvestment. EBIT (Operating profit) — operating profitability AFTER depreciation. Use for capital-intensive companies where depreciation is a real cost (machines wear out). Good for industry, telecom, infrastructure. Net profit — the profit shareholders receive (after interest rate, tax, depreciation). Use for P/E valuation and dividend capacity. Good for mature companies with stable financing. The same company can have: EBITDA margin 30%, EBIT margin 15%, net profit margin 8%. The difference between EBITDA and EBIT shows CAPITAL INTENSITY — a large difference = capital-intensive company (telecom: EBITDA 40%, EBIT 10% = massive depreciation). Small difference = 'asset-light' company (SaaS: EBITDA 30%, EBIT 28% = small depreciation).

⚡ KEY INSIGHTS EBITDA isolates operating profitability — removes interest, tax, depreciation to compare companies 'as if' financed alike Created in the 1980s for LBO analysis — to assess debt capacity EBITDA vs EBIT: large difference = capital-intensive company (machines wear out); small difference = asset-light Buffett hates EBITDA ('bullshit earnings') — ignores depreciation, which is a real cost 2

What is depreciation?

Depreciation is the accounting method by which companies spread the cost of an investment over its useful life. If the company buys a machine for 100 MSEK with a 10-year life, 10 MSEK is booked as depreciation per year — not 100 MSEK in the investment year. The idea is to match the cost against the revenue the machine helps generate. Depreciation is a non-cash cost — the money leaves the company at the time of investment, not at the depreciation. This is the reason EBITDA 'adds back' depreciation: the company generates cash corresponding to EBITDA, and depreciation does not directly affect cash flow. BUT — this is only true if the company does NOT need to invest in new machines. When the machine wears out (after 10 years) the company must invest 100 MSEK again — and then the money leaves the company. Depreciation is thus a DEFERRED cost. A company with EBITDA of 50 MSEK but investments (CapEx) of 40 MSEK has only 10 MSEK of 'real' profitability — this is called 'owner earnings' (Buffett's concept) or FCF (Free Cash Flow).

📖 DEFINITION

Depreciation = systematic spreading of investment cost over the asset's useful life. Non-cash cost. When EBITDA 'adds back' depreciation, it assumes the company does not need to reinvest — which is rarely true.

When EBITDA is a lie: capital-intensive companies

For capital-intensive companies EBITDA is a dangerous illusion. Telecom companies (Telia, Ericsson, AT&T) have large investments in networks (3G, 4G, 5G, fibre) that must be rebuilt every 8-10 years. Their EBITDA margin can be 35%, but CapEx is 25% of revenue — the 'true' cash flow margin is only 10%. A company reporting 'EBITDA margin 40%' in the telecom industry is often less profitable than a SaaS company with a 20% EBITDA margin, because the SaaS company has CapEx of only 2-3%. Ericsson illustrates this: EBITDA margin often reported around 12-15%, but with R&D investments (which are partly capitalized) and network investments, the true cash flow margin is much lower. The stock has gone sideways for 10 years because of this. Conclusion: the EBITDA margin should ALWAYS be supplemented with CapEx analysis. Formula: EBITDA − CapEx = 'EBITDA-less-CapEx' or approximation of FCF. This is the true operating profitability.

⚠️ WARNING

An EBITDA margin without CapEx context is meaningless for industry/telecom. A company with a 30% EBITDA margin and 25% CapEx is less profitable than a company with a 15% EBITDA margin and 3% CapEx. Always compare EBITDA margin minus CapEx intensity.

When EBITDA is relevant: asset-light companies

For asset-light companies — SaaS, consulting, services, brand-driven consumer companies — EBITDA is an excellent metric. These companies have low CapEx (2-5% of revenue) and small depreciation. The EBITDA margin is then a good approximation of true profitability. Microsoft has EBITDA margin ~50% and CapEx ~12% — 'EBITDA-less-CapEx' ~38%, still very high. Adobe: EBITDA margin ~35%, CapEx ~3%, EBITDA-less-CapEx ~32%. Hexagon: EBITDA margin ~38%, CapEx ~5%, EBITDA-less-CapEx ~33%. SaaS companies generally: the EBITDA margin lies close to the EBIT margin because depreciation is small. Here EBITDA is useful — it shows true operating profitability without hiding large future investments. Rule of thumb: if CapEx > 10% of revenue, avoid EBITDA; if CapEx < 5%, EBITDA is relevant. In the middle range (5-10%), be careful and supplement with FCF analysis.

✓ TIP

Always calculate EBITDA margin minus CapEx intensity. This gives a better approximation of true profitability than EBITDA alone. For SaaS the difference is small (3-5pp); for industry large (10-20pp); for telecom massive (15-25pp).

⚡ KEY INSIGHTS Depreciation is non-cash but represents future reinvestments — machines wear out For capital-intensive companies (telecom, industry) EBITDA is an illusion — calculate EBITDA − CapEx For asset-light companies (SaaS, services) EBITDA is relevant — CapEx is low, depreciation small CapEx > 10% of revenue = avoid EBITDA; < 5% = EBITDA is relevant; 5-10% = be careful 3