Revenue is the money a company earns from selling its products or services. EBITDA (earnings before interest, tax, depreciation and amortisation) is the profit from day-to-day operations. A margin expresses any profit as a percentage of revenue, how many paise of each sales rupee survive as profit at each stage.
What is the margin ladder?
Margins come in a ladder, and each rung answers a different question. Anjali works it out for Kaveri Motors, our fictional vehicle maker, using its P&L (walked through line by line in how do I read a profit and loss statement):
| Rung | Calculation | ₹ crore | Margin |
|---|---|---|---|
| Revenue | — | 1,000 | — |
| Gross profit | Revenue − cost of materials (600) | 400 | 40% |
| EBITDA | Gross profit − employee and other operating costs (200) | 200 | 20% |
| Net profit | After depreciation (50), interest (30) and tax (20) | 100 | 10% |
Read it top to bottom. Of every ₹100 of vehicle sales:
- ₹60 goes into steel, tyres and parts, leaving a gross margin of 40%. How profitably the product itself is made and priced.
- Another ₹20 goes to salaries, marketing and running the company, leaving an EBITDA margin of 20%. How efficient the whole operation is.
- Depreciation, interest and tax take the rest, leaving a net margin of 10%, what finally belongs to shareholders.
Compute the ladder once and you know where the money leaks. A company with a fat gross margin but a thin EBITDA margin is spending heavily on overheads or marketing. One with a good EBITDA margin but a skinny net margin is likely carrying heavy debt or heavy depreciation.
Why do analysts talk about EBITDA so much?
EBITDA sits above three items that vary for reasons unrelated to day-to-day operations: interest (depends on how much debt the company chose), depreciation (depends on accounting life of assets) and tax. Stripping them out makes the underlying operations of two companies easier to compare, and it's the denominator in the valuation measure covered in what is EV/EBITDA.
But EBITDA flatters. Machines genuinely wear out and loans genuinely charge interest; ignoring them doesn't make the costs disappear. A capital-hungry business bragging about EBITDA while net profit stays near zero is telling you only half the story.
What is a "good" margin?
There is no universal number. Margins are a property of the industry as much as the company. A supermarket chain may run on a 3% net margin and thrive on volume; a software firm may earn 25% on modest volume. Comparing a retailer's margin to a software company's is meaningless, which is the same reason sector context matters everywhere in analysis. See what are sectors, and why do sector stocks move together.
Two comparisons that do work:
- Against the company's own history. Kaveri Motors' EBITDA margin drifting from 20% to 15% over three years means costs are winning; drifting up means pricing power or efficiency.
- Against direct peers. If a rival fictional carmaker manages 25% EBITDA margins while Kaveri Motors manages 20%, ask what the rival does differently.
Things to keep in mind
- Always ask "margin of what?". Gross, EBITDA and net margins tell different stories, and headlines often quote whichever flatters.
- Compare margins within an industry and across time, never across unrelated industries.
- Rising revenue with falling margins can mean a company is buying growth with discounts. Growth and profitability need reading together.
- High margins attract competition and can erode; a margin is a snapshot, not a promise.
Read next
How do I read a balance sheet? — Profit is half the picture. What the company owns and owes is the other half.