Hi guys:
I'm looking at an equipment rental company, and would appreciate your thought on the question below. The company accounts for "Depreciation of equipments on rent" within its Cost of Sales. Therefore, in its reported EBITDA, depreciation of equipments on rent is not added back.
Should I adjust the EBITDA by adding back the depreciation of equipment on rent please? Would really appreciate your thoughts, thank you!
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If company reported EBITDA doesnt add-back depreciation then it’s probably for a valid reason. For example, rental car comapny depreciation is frequently akin to a cash expense because of the repurchase agreements they have with the equipment manufacturer. Avis and Hertz are two good examples where you really need to focus on what they call corporate EBITDA.
This site, and particularly pages 5/6, should help clarify: http://www.investorcampus.com/Courses/TheHowtoAnalyseSeries/Commerceand…
Thank you, Lmao2018 !
I just went through the PDF and have a follow-up question please. The PDF says - "This is because effective use of leverage against the assets can result in shareholders getting a return on their funds well above the industrial average".
In this context, what does "effective use of leverage against assets" mean please? At first glance, I thought it meant how much debt the company took, but it doesn't sound right in my mind as I can't link it to operational quality of the business? Could you clarify on this if you don't mind? Thanks!
I believe it’s just referencing that the fleets are debt finananced. The EV of the company comes from the services it provides and isn’t reflected simply by taking the NAV.
Also, the following point on EV/EBITDA being a poor valuation metric is in reference to “gross EBITDA.” Look at the last slide of this old HTZ presentation: http://filecache.investorroom.com/mr5ir_hertz/632/download/Hertz%20Inve…
When people value Hertz they do use EV/EBITDA, but they use “corporate EBITDA”, and you don’t count the securitization agreements as standard debt. So for Hertz you might see 17bn of debt, but they only have 4bn of corporate debt which is what investors are actually focused on.
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