AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 54 : 22.08.2020

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 Financial Ratios

Profitability Ratios Part -1

 EBITDA Margin (Operating Margin):

Earnings before Interest Tax Depreciation and Amortization (EBITDA) Margin is measurement of a company's earnings before interest, taxes, depreciation and amortization as a percentage of its net sales.

 EBITDA Margin = EBITDA / Net Sales

 This important financial ratio tells us about the company's profitability (in percentage terms) at the operating level. Hence it is also known as Operating Margin. It tells us about the efficiency of the management and operational efficiency of the company. EBITDA Margin can be useful for comparing different companies from the same sector having different capital investment, debt and tax profiles.

 PAT Margin:

Profit After Tax (PAT) Margin is measurement of a company's net profit as a percentage of its net sales.

 PAT Margin = PAT / Net Sales

EBITDA Margin is calculated at the operating level where we consider only operating expenses while PAT margin is calculated at the final profitability level taking into account all other expenses including interest cost, depreciation and tax expenses. PAT Margin is also very important and is case of many companies you will see that EBITDA

Margin is good enough ranging around 15 - 25 % but their PAT Margin is very low around 5 - 6 % only. This may be because of high interest cost burden or huge depreciation expense due to working in an asset intensive business.

 

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