How to make money in stocks. Lesson 26. EBITDA margin. Netflix vs Comcast

The EBITDA margin is a measure of operating profit. It helps stakeholders understand the company’s operating profit and status in terms of cash flow. The matric is calculated by dividing the company’s EBITDA by its net revenue.
The EBITDA margin shows how much of EBITDA (earnings before interest, taxes, depreciation, and amortization) is generated as a percentage of revenue. EBITDA is calculated after deducting operating expenses, such as cost of goods sold, general and administrative sales expenses, etc., from total sales. In this case, depreciation and amortization aren’t factored in.

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Formula

See the definition of the Net Sales in Lesson 24.

We have examined EBITDA closely in Lesson 25.

Now let’s move on to practice.

Real-world case. #NFLX #CMCSA

1. #NFLX EBITDA for financial year ended in December 2020 totals:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization = $2,761.40 + ($767.50 + $618.44) + $437.95 + ($10,806.91 + $115.71) = $15,507.91

2. #NFLX EBITDA Margin for financial year ended in December 2020 totals:

EBITDA Margin = EBITDA / Net Sales = $15,507.91 / 24,996.06 = 62.04%

Netflix’s margin totaling 62% means that 38% of revenues account for operating expenses.

For example, with the 58% margin, the share of such expenses totaled 42% in March 2019.

3. Here is another figure for comparison. EBITDA margin of #CMCSA for the financial year ended in December 2020 totaled:

EBITDA Margin = EBITDA / Net Sales = $30,593 / $103,564 * 100 = 29.54%

By comparing two companies in terms of their margin within a single sector and industry with a similar capitalization, we find out that both companies show excellent performance. #NFLX having an EBITDA margin of 62% is more efficient in cutting operating expenses and maximizing profit. #CMCSA is probably more focused on sales growth. The gap between their EBITDA margins has been widening over the past five years.

4. In terms of #NFLX dynamics, this is what we see:

EBITDA margin of 62.04% has been the maximum figure over the last five years.
A gradual increase in margin has been observed since 2019.
The previous peak point totaling 61.53% was recorded in March 2017.

Standard

A decent EBITDA margin is a higher metric only in comparison with peers.
A decent EBITDA margin is a higher metric only in comparison with peers.
Generally, a higher percentage means that the issuer can easily pay operating expenses.
A lower percentage shows problems with the company’s profit and cash flow.

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Relevance

1. The EBITDA margin reflects operating profit. This metric minimizes the impact of capital structure and non-monetary items, such as depreciation and amortization. It gives an idea of how much cash a company generates per unit of revenue.

2. The EBITDA margin usually doesn’t take into account company-specific non-core effects. Every company pursues its amortization policy. Besides, capital structures can vary significantly. Eliminating these items helps make a basic comparison between the two companies.

3. The EBITDA margin is an implied alternative to the net profit margin that includes amortization, interest expenses, and taxes. Nevertheless, such expenses don’t affect the EBITDA margin even if tax regimes differ greatly.

4. The EBITDA margin comes in handy when you assess whether the company’s efforts to cut costs are efficient. The higher the EBITDA margin, the lower the company’s operating expenses in terms of revenue.

Drawbacks

Giving the appearance. A high metric means a stable profit. An issuer with some low profit can take advantage of margins by using the EBITDA margin instead of the net profit margin.
Non-GAAP. As EBITDA doesn’t stick to GAAP and is unregulated, some issuers may present a company’s optimistic financial position.
Improper use. You’d better not use the EBITDA margin to compare companies with high debt capitalization, as their interest expenses will be extremely high, while the EBITDA margin won’t reflect the loan amount. Besides, when comparing two companies (one with a low debt burden and the other with a high debt burden), the results may be incorrect. To assess a company with a lot of debts, you’d better use a metric that takes into account its loan.
Overstating. Issuers with a lot of debts or large fixed assets opt for the EBITDA margin. Given that the bottom line will be lower due to additional expenses, they can use the margin to show the data to advantage.

⇐ How to make money in stocks. Lesson 25. EBITDA. Comcast corp. Key to making money with shares. How to pick stocks ⇒

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