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EBITDA Margin vs Operating Margin: Key Differences Explained

Anshika

Understand EBITDA Margin vs Operating Margin to explore how each metric reflects profitability through different cost inclusions.

Understanding a company’s profitability is important for investors, analysts, and business owners. Among the most widely used profitability measures are EBITDA margin and operating margin. While both highlight how efficiently a company runs its operations, they differ in what they include or exclude — and therefore reveal different insights about financial performance.

What Is EBITDA Margin

EBITDA margin measures a company’s operating profitability before accounting for non-cash expenses, financing costs, and taxes.

It shows how much operating cash profit a business generates from its revenue.

EBITDA stands for:

  • Earnings

  • Before

  • Interest

  • Taxes

  • Depreciation

  • Amortisation

A higher EBITDA margin reflects greater operational efficiency and a larger portion of revenue converted into operating cash profit.

How to Calculate EBITDA Margin

The formula is:

  • EBITDA Margin = (EBITDA ÷ Revenue) × 100

Where:

  • EBITDA = Operating Profit + Depreciation + Amortisation

  • Revenue is the total income generated from business operations.

Steps:

  1. Start with operating profit (EBIT).

  2. Add depreciation and amortisation.

  3. Divide by revenue.

  4. Multiply by 100 to convert to percentage.

What Is Operating Margin

Operating margin shows the percentage of revenue left after paying all operating expenses, including depreciation and amortisation.

It reflects profit after all operating costs are deducted, but before interest and taxes.

This metric captures the efficiency of day-to-day operations — production, salaries, marketing, rent, and more.

How to Calculate Operating Margin

The formula is:

  • Operating Margin = (Operating Income ÷ Revenue) × 100

Operating income (EBIT) already includes depreciation, amortisation, and all operating expenses.

EBITDA Margin vs Operating Margin: Key Differences

Here’s how the two margins differ across key parameters:

Aspect EBITDA Margin Operating Margin

Includes Depreciation & Amortisation

No

Yes

Reflects Non-cash Costs

Excludes

Includes

Measures Cash Operating Profit

Yes

Not fully

Suitable for Capital-intensive Businesses

Very useful

Can be distorted

For Comparing Companies

Across industries with varying asset bases

Within the same industry

Sensitivity to Cost Structure

Less sensitive

More sensitive

Shows Operational Efficiency

Partially

Strong indicator

In short:

  • EBITDA margin focuses on core cash profitability.

  • Operating margin provides a more realistic profit picture after accounting for necessary asset costs.

Relationship Between EBITDA Margin and Operating Margin

EBITDA margin is always equal to or higher than operating margin because it adds back depreciation and amortisation.

For businesses with heavy investments in machinery, infrastructure, or R&D, the difference between the two can be significant.

Significance of EBITDA and Operating Margins

Here’s why both metrics matter when analysing a company’s performance:

EBITDA Margin Helps To:

  • Evaluate pure operational cash earnings

  • Compare companies with different capital structures

  • Assess debt-heavy or asset-light businesses

Operating Margin Helps To:

  • Measure true operating efficiency

  • Understand how well costs are managed

  • Identify sustainable profitability

Both metrics together provide a complete picture of a company’s operational health.

Limitations of EBITDA and Operating Margins

Here’s how the two profitability metrics differ across key parameters:

EBITDA Margin Limitations

  • Ignores essential costs like depreciation

  • Can overstate profitability

  • May be manipulated by adding back items

Operating Margin Limitations

  • Can penalise capital-intensive industries

  • Harder to compare across diverse sectors

  • Depreciation methods may distort results

Example Comparison of EBITDA Margin vs Operating Margin

Suppose a company has:

  • Revenue: ₹100 crore

  • Operating Income (EBIT): ₹20 crore

  • Depreciation & Amortisation: ₹5 crore

EBITDA = 20 + 5 = ₹25 crore

EBITDA Margin = (25/100) × 100 = 25%
Operating Margin = (20/100) × 100 = 20%

Interpretation:

The 5% difference shows the impact of depreciation and amortisation on overall profitability.

Conclusion & Key Takeaways

EBITDA margin and operating margin together provide a clearer picture of a company’s operational strength. One highlights cash-driven profitability, while the other captures the full cost structure. Using them side by side helps assess performance, efficiency, and sustainability more accurately across industries and time periods.

Points to keep in mind:

  • EBITDA margin measures cash-based operating profitability.

  • Operating margin measures real profitability after all operating costs.

  • EBITDA margin is typically higher because it excludes depreciation and amortisation.

  • Using both metrics gives a complementary view of a company’s financial performance.

  • EBITDA margin is commonly used for cross-company comparisons, while operating margin reflects efficiency assessment.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What is EBITDA margin?

EBITDA margin represents the percentage of revenue remaining after covering operating expenses excluding depreciation and amortisation. It reflects the cash-based operating performance of the business.

What is operating margin?

Operating margin measures the proportion of revenue left after deducting all operating expenses, including depreciation and amortisation. It shows the profitability of core operations after accounting for non-cash operating costs.

How is EBITDA margin calculated?

EBITDA margin is calculated using the formula:
EBITDA ÷ Revenue × 100.
This expresses EBITDA as a percentage of total revenue.

How is operating margin calculated?

Operating margin is calculated using the formula:
Operating Income ÷ Revenue × 100.
This shows the share of revenue converted into operating profit.

What is the main difference between EBITDA margin and operating margin?

EBITDA margin excludes depreciation and amortisation, focusing on cash profitability, while operating margin includes these non-cash costs, providing a fuller view of operational performance after accounting for asset usage.

Why do companies use both EBITDA and operating margins?

Both margins are used because they provide complementary insights: EBITDA margin highlights cash-generating ability, whereas operating margin reflects true operational efficiency after considering depreciation and amortisation. Together, they give a balanced view of profitability.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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