If all you had for a given company is its revenues, would you feel more comfortable applying industry gross margins or industry EBITDA margins to try and GUESStimate that company's operating profitability? My hunch, is that gross margins are more stable than EBITDA margins. Hence, a guesstimate of gross profit would be more reliable than an guesstimate of EBITDA using industry averages. Is that correct?
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since you want operating profitability, wouldn't it be better to use ebitda since it accounts for all costs of the business instead of gross which accounts only for cogs? I may be wrong, but the structures would be varying from one firm to another. So wouldn't ebitda margin be better for operating profitability since it shows a company's performance without accounting its structure? feel free to correct me if I'm wrong
Some companies could differ in their cost determination method (while one can consider a certain expenditure a cost, other could account it as an administrative expense), therefore, leading to different gross margins in the same industry. To avoid this, I would certainly look for EBITDA margins.
Apologies, I think I phrased my question incorrectly. Say if we realigned everyone's cost determination method to the same rule. Empirically, which measure is more volatile across companies within a given indistry, gross margins or EBITDA margins?
In this case, I would say that EBITDA margins are more volatile. Companies can have different sales structures (wholesale, distribution, etc.), administrative structures, and therefore different SG&A expense ratios as % of revenues. I have seen one case that illustrates this and is related to pharma companies: one global pharma company acquiring part of a small lab's portfolio, and the key metrics used for analysis were gross margins by product.
I'd imagine that this depends on the industry you're looking at. Specifically if the typical cost structure is more variable cost (eg consumer products/wholesale & distribution) or fixed cost (eg airlines/logistics) driven.
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