EBITDA and EBIT
Hi guys, needed some help regarding EBIT and EBITDA please.
I get EBITDA = EBIT + DA.
Could you please explain why EBITDA is independent of capital structure, i.e. it is used to find enterprise value and not equity value.
And similarly how is EBIT dependent on the capital structure, i.e. why it's used to find equity value and not enterprise value.
The difference is depreciation and amortisation, don't see how this is entirely related to capital structure. I think I'm missing out on something.
Thanks in advance! :)
EBIT and EBITDA are both used in enterprise value multiples, not equity value. They both reflect the full capital structure because they exclude interest, so it's available to both debt and equity investors.
Using EBIT vs EBITDA has nothing to do with capital structure in the way of equity/debt - it has more to deal with the company's operating model (whether it is capital intensive, do they lease vs buy PP&E, etc).
The distinction you are thinking of is levered vs unlevered free cash flow. Levered free cash flow is FCF after interest payments and mandatory debt repayments, meaning the debt investors have been satisfied and that levered FCF is all for the equity investors. Hence, you use an equity/levered FCF multiple.
Unlevered is the opposite, it is FCF available to both debt & equity investors (meaning FCF before interest/mandatory debt repayment) so you would use a EV/unlevered FCF multiple.
You guys are too good. Thanks so much! Will try to go through this further. Thanks again. (I'll drop a quick message again if needed if that's okay :) ) Thank you!
First of all EBITDA != EBIT + DA. I always like to think that EBITDA is EBIT + Other non cash expenses.
Using them completely depends upon you - for example, I always enjoy using EBITDA for intensive capital industries as noncash expenses are non significant of company activity. As my peers above said, you might use operating income or EBITDA for unlevered or levered free cash flow.
If you have any other doubt feel free to ask, I would love to help!
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