This way you could increase the EBIT margin in all kinds of ways. Ways to do this, for example, are increasing your prices and looking closely at your costs. An EBIT margin between 10 and 15 percent is generally considered a good value.
However, a high ratio may also indicate that a company is overlooking opportunities to magnify their earnings through leverage. As a rule of thumb, an ICR above 2 would be barely acceptable for companies with consistent revenues and cash flows. In some cases, analysts would like to see an ICR above 3.
A good EBIT percentage refers to a healthy Earnings Before Interest and Taxes percentage, indicating a company's profitability before considering interest and taxes. Generally, a higher EBIT% signifies stronger financial performance and efficiency in generating profits.
EBIT vs revenue: understanding the ratio
The EBIT margin shows the EBIT ratio measuring a company's operating profit against its total revenue. A good EBIT ratio is considered to be 10% and above. This EBIT percentage indicates good company health.
There are some common thresholds for EBIT: A margin below 3% is considered to be not profitable (boo!) A margin from 3% to 9% is considered viable (meh) A margin above 9% means your company has good earning potential (woohoo!)
The Rule of 40 – popularized by Brad Feld – states that an SaaS company's revenue growth rate plus profit margin should be equal to or exceed 40%. The Rule of 40 equation is the sum of the recurring revenue growth rate (%) and EBITDA margin (%).
Small middle market companies generally trade at multiples of 5 to 7 EBIT, but there are so many exceptions to this general rule that one hesitates to proclaim the general rule. In the end it usually requires the judgment of a seasoned M&A professional to decide upon an appropriate multiple.
Earnings before interest and taxes (EBIT) measures a company's net income before income tax and interest expenses are deducted.
EBITDA margin is a company's trailing twelve month EBITDA divided by trailing twelve-month net sales. Similarly, for calculating quarterly margins, quarterly EBITDA is divided by quarterly sales.
Different sectors can present very different average EBIT margins. Software companies can easily reach margins of 25%, and some manufacturers can even have a dazzling EBIT margin of 30 to 40%. On the other hand, even successful businesses in retail tend to lie in single figures.
Tesla EV/EBITDA
As of 2025-01-11, the EV/EBITDA ratio of Tesla Inc (TSLA) is 96.3. EV/EBITDA ratio is calculated by dividing the enterprise value by the TTM EBITDA. Tesla's latest enterprise value is 1,256,724 mil USD. Tesla's TTM EBITDA according to its financial statements is 13,051 mil USD.
Some policymakers are now seeking reversal of the tightening of interest deductibility that occurred in 2022, though, which limited interest deductions to 30% of taxable income based on EBIT rather than the more generous EBITDA.
The relatively high TIE ratio means the company's EBIT is 2 to 3 times its annual interest expense, which is a margin of safety for the risk of making interest payments on debt.
Generally speaking, a good EBITDA margin for manufacturing businesses falls between 5% and 10%. However, this will vary depending on the specific industry you are manufacturing your products for, and how capital-intensive your operations are.
A “good” EBITDA margin is industry-specific, however, an EBITDA margin in excess of 10% is perceived positively by most.
Earnings before interest and taxes (EBIT) is one of the subtotals used to indicate a company's profitability. It can be calculated as the company's revenue minus its expenses, excluding tax and interest.
Both EBIT and EBITDA strip out the cost of debt financing and taxes but EBITDA takes another step by adding depreciation and amortization expenses back. Depreciation isn't captured in EBITDA where two companies have varying amounts of fixed assets so EBITDA can be a better number to compare operating performance.
The Revenue Multiple Method
The revenue multiple used often falls between 0.5 to 5 times yearly revenue depending on the industry. For a company doing $2 million in gross annual sales, that could equate to a business valuation between $1 million (0.5X multiplier) up to $10 million (5X yearly sales).
Therefore, Apple's EV-to-EBIT for today is 30.11. During the past 13 years, the highest EV-to-EBIT of Apple was 33.00. The lowest was 7.49. And the median was 17.65.
In general, private companies sell between 2X and 10X EBITDA, with the majority of transactions in the 4X to 6X range. Therefore, a company with annual EBITDA of $1MM is generally worth between $2MM and $10MM. There are, of course, outliers where companies are worth more or less than this range.
The rule of thumb for growth rate expectations at a successful SaaS company being managed for aggressive growth is 3, 3, 2, 2, 2: starting from a material baseline (e.g., over $1 million in annual recurring revenue [ARR]), the business needs to triple annual revenues for two consecutive years and then double them for ...
Average EBIT means the arithmetic mean of the following for each fiscal year during the Performance Period: the Company's Adjusted EBITDA (as reported on the Company's audited financial statements) for each such fiscal year, reduced by depreciation, depletion and amortization charges for such fiscal year.
Rule Of 40 FAQs
The Rule of 40 states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.