RE:EBITDAbandit69 wrote: This is a good write up regarding EBITDA from someone directly involved in company restructurings and is/was president of the American Bankruptcy Institute. His knowledge is clearly superior to mine as are his credentials.
It confirms what I said before about someone buying another company based on EBITDA. As mentioned EBITDA is a gross up number, so one ends up paying a gross'd up purchase price. He also talks about EBITDAR (Rent) which I have mentioned before. I have known about companies trying to use rent to form EBITDAR but I did not get that lesson from this article. I learned that one long ago.
EBITDA Author:
I am 2018-19 president of the American Bankruptcy Institute and a certified turnaround professional. Before becoming managing director and founding partner of Gavin/Solmonese LLC, I led the Bankruptcy & Fiduciary Services Practice and Creditors Services Group at NHB Advisors, one of the country’s leading turnaround firms, which is now part of Gavin/Solmonese. I frequently write and speak on topics concerning bankruptcy, restructuring and management of distressed companies. Besides a writer, I am a husband, dad to two grown daughters, Tesla driver, Peloton enthusiast, the world's okayest rhythm guitarist, maker of sort-of-passable wine and drinker of excellent wine.
First, I want to start by saying that I generally agree with the author in the sense that cashflow is king. That said, I'll point out that nowhere, in what he says (including different valuation methods), is the mention that net earnings are a good valuation metric at all.
That said, I disagree with him in the sense that for the investors that can't read cashflow statements (which is, imo, the majority on here), EBITDA is a decent proxy, with the caveat that I already mentionned... the better measure is EBITDA adjusted for capex expenses (in the REIT world, AFFO). The problem nowadays is that many depreciation and amortization don't lead to future capex charges, and as such, are not relevant to future value or cash flows.
I also mentionned that EBITDA coverage of interests is a valuable metric, which you should be considered when evaluating the value of a business, and which covers another potential "shortfall" of the author.
The point about working capital requirement is relatively moot. Once the need for the "Holiday" season, as mentioned, has been met, then working capital won't increase further for the next Holiday season. You only have to build your war chest once. So, in calculating future cashflows, it's not a recurring event as long as it's been considered in the initial calculation.
While EBITDA doesn't strictly adhere to GAAP (as in, GAAP doesn't officially recognize it), EBITDA should be calculated based on GAAP recognized charges. As it is stated, EBITDA is earnings before tax income, depreciation and amortizing. Tax Income, depreciation and amortizing are part of the net earnings, and to say that adding them back to net earnings makes it something that can be "easily" manipulated is just saying that financial reports can be easily manipulated. Just like any financial report, you need to look at it and see that the proper charges were reported, but otherwise it's a fairly standard calculation based on audited numbers. There's also a reason why EBITDA is a standard, while EBITDAR (and other changes) aren't.
Most businesses will reconcile EBITDA to Net Earnings or Operating Cashflows. I think investors should look at those as they are informative. For a specific industry, EBITDA multiple is a better metric as the usual capex costs are already part of that specific industry's multiple.