EBIT Margin is an important efficiency ratio. It is an important parameter of fundamental analysis for any company. Efficiency ratios are used to analyze how well the company is managing its revenue and cost balance in order to increase profits. It is used to measure the performance of the company, current and past and thus helps to predict the future too. We will discuss about EBIT in detail to understand its importance.
EBIT stands for Earnings before Interest and taxes. EBIT Margin (%) is the ratio which measures the Earnings before Interest and taxes to Net Income. This margin allows investors to understand true business costs of running a company.
You can also watch the below video on Everything you want to know about EBIT (Earnings before interest and tax) Margin:
Impact of EBIT Margin (%)
It gives information on the company’s ability to earn. Rise in the EBIT is mainly because of the growth in net income, efficient cost control and strong productivity. Similarly the decrease in this Margin is mainly due to the reduction in revenue and higher operating costs. This ratio is most useful when comparing the company with its peers. High value reflects more profitability and efficiency of the business. If the company is not able to generate a positive EBIT Margin for a long period of time, then the company should think about its business model.]
Formula = ((Earnings before Interests and Taxes (EBIT)) /Net Revenue
Therefore, a firm with revenue Rs 125,000 and EBIT of Rs. 15,000 would have an EBIT margin of 15,000/125,000 = 12%.
We don’t have to calculate this margin on our own. StockEdge gives us this margin of the last five years of any company listed in the stock exchange. We can look and compare this margin of any company and filter out stocks accordingly.
Suppose we want to look at the EBIT Margin (%) of ITC Ltd. of last 5 years. In the Fundamental tab of ITC Ltd., click on the fundamentals tab, we will get Ratios tab. Then in the Ratios tab click on Efficiency Ratios, EBIT Margin (%)of ITC Ltd will be shown.
EBIT Margin (%) can be used as a relative indicator for cross-sector comparisons, however, varies greatly between industries as both net revenue and EBIT directly impacts EBIT Margin (%). This data is easily available under ratios section of each shares. Thus to filter out companies generating increasing EBIT margin in seconds subscribe to Stockedge. If you still do not have the StockEdge app, download it right now to use this feature. It is a part of the free offering of StockEdge App.
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