What are EBITDA and the EBITDA margin?
EBITDA is the acronym for Earnings Before Interest, Taxes, Depreciation and Amortisation. It is a measure of a company's operating result that excludes several items unrelated to day-to-day operations.
The EBITDA margin relates this operating profit to revenue. It answers a simple question: for every €100 of revenue, how much does the company generate in operating profit before financial and accounting effects?
Why "before" depreciation? Depreciation and amortisation are non-cash accounting charges — they reduce reported profit but no money leaves the business. By adding them back, EBITDA gets closer to operating cash flow, giving a more faithful picture of the company's ability to generate cash.
What EBITDA neutralises
Three items are deliberately excluded from EBITDA, and that is precisely its strength:
- Financial interest: two companies that are operationally identical but carry different levels of debt will have the same EBITDA but very different net incomes. EBITDA allows you to compare their operating performance independently of their financing choices.
- Taxes: tax rates vary across countries and tax regimes. Excluding taxes allows for consistent international comparisons.
- Depreciation and amortisation: depreciation policies (asset useful lives, methods) vary across companies and accounting standards (local GAAP vs IFRS). Excluding them avoids the biases tied to these accounting choices.
How to calculate the EBITDA margin
To calculate EBITDA itself, there are two methods:
A worked example
A small business on Euronext Growth with:
- Revenue: €18M
- Net income: €1.8M
- Taxes: €0.6M
- Net interest expense: €0.4M
- Depreciation and amortisation: €1.2M
- EBITDA = 1.8 + 0.6 + 0.4 + 1.2 = €4.0M
- EBITDA margin = 4.0 ÷ 18 × 100 = 22.2%
Beware of adjustments: some companies report an "adjusted EBITDA" or "normalised EBITDA" that excludes exceptional items (restructuring costs, litigation, and so on). Always check what is being excluded. An adjusted EBITDA can be significantly more flattering than the actual EBITDA — this is particularly common among small caps in the middle of a transformation.
EBITDA margin by sector: very different levels
As with the P/E, the EBITDA margin can only be interpreted in a sector context. A food retailer with a 5% EBITDA margin can be excellent within its sector, while a SaaS company with the same margin would be in serious trouble.
These ranges are reference points for the Euronext Growth and Euronext Access universe. The relative sector scoring of Screener Small Caps compares each stock to the median of its sector — a company with a 12% EBITDA margin in industrials earns a bonus if the sector median is at 8%.
The margin trend: more important than the level
The point-in-time level of the EBITDA margin matters, but the trend over 3 to 5 years is often even more predictive of future outperformance. This is one of the key findings of the Screener Small Caps ML model, which explicitly includes ebitda_margin_trend (the OLS slope over 5 years) as a feature.
A concrete example: a company with an 18% EBITDA margin that has been declining by 2 points a year for 5 years (down from 28% to 18%) is structurally less attractive than a company with a 12% margin that has improved steadily over 5 years (up from 7% to 12%). The screener accounts for both dimensions.
EV/EBITDA: the professionals' favourite valuation ratio
EV/EBITDA (Enterprise Value / EBITDA) is the valuation ratio most used by M&A analysts and professional fund managers. It combines the EBITDA margin with the market valuation to answer the question: "what price are you paying for this level of operating profitability?"
Why EV/EBITDA is superior to the P/E for small caps
Three concrete advantages over the P/E:
- It captures debt: two companies with the same operating profitability but different levels of debt will have different EV/EBITDA values — which is consistent with their real risk.
- It is insensitive to depreciation: a company with old assets (little depreciation) and a company with recent assets (high depreciation) are compared fairly.
- It works when the P/E does not: if net income is negative but EBITDA is positive (a frequent case on Euronext Growth), EV/EBITDA remains calculable and interpretable.
| EV/EBITDA | General interpretation | Signal |
|---|---|---|
| < 5x | Very undervalued — rare, often linked to a specific problem | Analyse in depth |
| 5 — 8x | Undervalued for a small cap — potentially attractive | Attractive if quality is confirmed |
| 8 — 12x | Fair value — in line with the small-cap market average | Neutral |
| 12 — 18x | Quality or growth premium | Requires visible growth |
| > 18x | High valuation — strong growth required | Risk of disappointment |
In the screener: EV/EBITDA is the most heavily weighted criterion in the Valuation pillar (up to 10 of 25 points). An EV/EBITDA below 8x on a small cap with solid fundamentals is treated as a significant discount.
Limitations of the EBITDA margin
Despite its qualities, EBITDA has several important limitations worth knowing.
1. Depreciation is a real charge
Warren Buffett has often criticised the use of EBITDA because "depreciation is a real expense" — assets wear out and must be replaced. For a very capital-intensive company (heavy industry, real estate), ignoring depreciation can paint a misleadingly flattering picture of profitability. That is why you should always compare EBITDA to FCF to check conversion.
2. It ignores working capital
A company can have an excellent EBITDA margin yet consume a lot of cash because of fast-growing working capital — it delivers but its customers pay late. EBITDA does not see this problem. FCF does.
3. "Adjusted" EBITDA can mask recurring problems
The "non-recurring items" excluded from adjusted EBITDA sometimes have a habit of coming back every year. "Exceptional" restructuring costs that appear 4 years out of 5 are not really exceptional. Always compare adjusted EBITDA to reported EBITDA.
Go further: the Fundamental Analysis cluster
New to screening European small caps? See the European small-cap stock screener guide and the glossary.