The higher the earnings before interest, taxes, depreciation, and amortization, the more money for the Owners to pocket or reinvest in the business after paying their variable and fixed expenses.
A lower earnings ratio indicates less money for the Owners to work with after paying their COGS and SG&A expenses. Use the BusinessCPR™ Management System to generate higher operating profits.
Overview
The EBITDA Earnings Ratio is a Profitability Ratio and is a top-level indicator of the current operational profitability of a business. As such, it’s often used to set performance standards around Net Sales and Operating Income.
The EBITDA Earnings Ratio is used to determine the profitability of a business’s operations before interest, taxes, depreciation, and amortization expenses are factored in. It is a more accurate picture of a company’s success than Gross Sales and a better proxy for cash operating profit.
The formula for EBITDA Earnings Ratio is calculated as follows:
(Gross Margin – SG&A Expenses before Interest, Taxes, Depreciation, Amortization) / Net Sales
A 15% EBITDA earnings ratio means that for every dollar of sales, only 15 cents of operating profit remains to cover interest, taxes, depreciation, and amortization expenses, and only what is left over can be paid out as dividends or reinvested into the business.
Higher is Better: means more money for the Owners to pocket or reinvest in the business after paying COGS + SG&A Expenses.
Lower is Worse: means less money for the Owners to work with after paying COGS + SG&A Expenses.