Monkeys - which of the two approaches are you using to calculate EBITDA, top down or bottom up? What line of work are you in?
I'm in corporate banking and have always gone the top down route (I.e. Revenues - cogs - opex +/- non-cash and non-recurring items embedded within the aforementioned categories). I now work with a few folks who are used to the bottom up calc and rooted in their old ways.
In my opinion top down is a cleaner calculation that requires less adjustments given you don't have to worry about adding back all the other income / expense, unusual & infreqent line items below operating income and wouldn't model out such items to begin with.
Bottom up. I'd say 95% of financial statements/compliance certificates reconcile to EBITDA starting from Net Income and you can end up spinning your wheels trying to reconcile to the same EBITDA going from top down. Given the subjective nature of what can be included in Other Income/Expenses, a critical analyst should be making a judgment call on whether those items are truly non-operating/non-recurring.
Agree with this, but the answer - like so many things in finance - is: it depends. What do the financials provide? Which way makes more sense for the company or industry in question? Often you can have incomplete information... and one makes more sense
Both. Top down for internal purposes and bottom up for credit agreement covenant compliance calcs
CB.
My 2 cents - I think either way is fine, but the top-down approach would be more helpful to see what drives the EBITDA. I think a major purpose of calculating the adjusted # is to show the earnings quality - hence a top-down approach, again, would be able to reveal which revenues should be stripped away due to non-recurrent nature, etc
If you're reporting EBITDA for debt covenant purposes, pretty much always bottoms up. The loan docs typically define EBITDA starting from NI and addback allowable adjustments (often with some dollar threshold on an LTM basis). For purposes of understanding a business and projections, top down.
I/my employer use top-down as for our internal memos (as alluded to, it gives a better picture of the operational capacity of the business in question) and make projections easier, although I will say from a compliance standpoint our docs are written as @jobless123" from the bottom up perspective, which i guess keeps everything uniform.
Embarrassingly enough this thread actually made me go back and look at our doc/commitment letter prefabs (all the LaserPro) and see how we defined it on a covenant basis.
Also LOL at any company's internal definition of "one-time" expenses, we all see you out here trying to dodge the tax man.
Thanks for the feedback guys, very helpful to see what others are doing.
I have another follow up question for you, those who are on the devt side, when running financial analysis are you guys doing your own analysis such as calculating your own EBITDA, leverage, other financial metrics or are you relying on company provided compliance information to analyze the company?
I'll give you an example, when looking at new clients, I work diligently work at arriving at an EBITDA/adjusted EBITDA figure that I am comfortable with and will diligence any items that I do not understand / require more information on (especially with lower quality financial reporting). I never run analysis by just vomiting the company provided compliance metrics as those calculations & definitions vary from company to company.
I'll echo what others said that in my first jobs at CB (especially at a top BB in the space) we always used top-down EBITDA for our internal analysis & projections while compliance reporting is always based on a bottom up figure. The one benefit from a bottom up approach is it would capture cash non-operating outflows that could still be a drain on cash flow and sink a company (if compliance does not allow for such items to be added back).
As has been said, top down approach is simpler to see the drivers of earnings given you are starting with recurring revenues and subtracting out core opex and making adjustments for the no cash/non-recurring. For instance I have a client that has significant JV activity running through other income which comprises various ancillary operations that are used to juice net income / CFL but are very much outside of core business model and can be volatile...id always back something out like that from an internal EBITDA figure even though it has a cash component.
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