Quick question -- for valuation purposes, you cannot have unlevered/levered or levered/unlevered ratios, correct? Meaning, either both numerator and denominator has to be levered(choice of capital structure) or unlevered(does not depend on cap structure)...but then why can you use EBITDA/Interest, since EBITDA is unlevered and interest is levered, or debt/ebitda? This many be a dumb question, but I really need clarity. Thank you so much.
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to see how many times your ebitda can service your interest (headroom), also EBITDA - Capex is used. it's all a proxy for cashflow, so lazy people are using it for cash flow to interest service (not very useful if you have an amortizing loan though)
Don't forget working capital/tax when looking at the cashflow. I hate it when people lazily use EBITDA as a proxy for cashflows. Business need capex, they have working cap requirements and tend to need to pay tax otherwise they'll be rammed by the tax authorities. Whenever someone talks of EBITDA they need to really look at the cash conversion rate and the sustainability/stability of this.
those aren't valuation multiples but credit/leverage ratios
Why isnt it useful if you have an amortizing loan Oreos? Thanks.
Because EBITDA is being used to represent cash flow purposes (like oreo says a "lazy way"), and amortizing loans would decrease ebitda and thus not reflect the proper leverage/coverage ratio (Limits the company's ability to invest in CAPEX because they are using cash flows to pay down debt (Loosely)
and just for clarity (as stated) it decreases ability for capex only because the cash is needed further down the cash cascade, capex isn't after repayments
Agreed with Both of the above.. Coverage ratios not valuations ratios.
balls -- can you please explain that in depth? What do you mean by amortizing intangibles and how they are different than debt, and I thought amortizing loans occurs pre tax, as its a non cash expense and is tax-deductible?
HYaddict -- i really do not understand what you mean. I get some of it. Can you perhaps break it down, when you get a chance?
Sorry guys, I am really new to this, but I am eager to learn. Please excuse all my dumb questions. Thanks.
The amortization of intangibles is what you think of in the traditional sense of non-cash "D&A" that is added back to get to EBITDA , yada yada.
Amortization of debt on the other hand is a cash expense and it is not included on the income statement, you will see it on the cash flow statement as an outflow which in turn reduces the principal amount on the liabilities portion of the balance sheet. Some term loans will amortize over the life of the loan, meaning that incremental portions are paid back periodically over the life of the loan. Senior or sub notes on the other hand will have a "bullet payment", meaning that the entire principal will be paid back in full at maturity (ideally). Either way, only the interest paid on the debt is tax deductible.
largely correct, however senior debt (whether bank debt or debenture) and sub notes can also be structured as amortizing...in fact, quite a few subordination agreements include permitted payment clauses allowing for p&i payments provided no default
EBIT/interest exp or EBITDA/interest exp (Originally Posted: 04/03/2017)
Hi everyone, when looking at interest cover, why would one use ebit/interest exp vs ebitda/interest exp or vice versa. kindly please help. thanks
Just think - why would you use EBIT instead of EBITDA?
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