Why EBITDA instead of Net Income
Was asked this question and didn't know the answer, can someone help? I can't find it anywhere on the site. Any help is greatly appreciated.
Trending Content - Investment Banking Forum
Career Resources
Because net income is affected by tax, financing costs, method of depreciation..etc.
Why EBITDA for what?
Assuming you mean why use it in ratios, a la EV/EBITDA rather than P/E or something... in theory EBITDA is supposed to be a better representation of cash generation from operations and takes out the financial aspects of the company like debt, taxes, and even depreciation. Unfortunately, in reality EBITDA is (as Charlie Munger says) just another word for "bullshit earnings." It's arbitrary insofar as depreciation is taken out when it very well could be a consistent charge against operations, and even interest can be seen the same way in many cases.
Depends on the context.
EBITDA is a better proxy for cash flow.
Less mature companies and companies in certain spaces, such as tech, often have non-existent or negligible earnings. If you want to do a meaningful comp or precedents analysis, you need to use revenue or EBITDA in those instances instead.
EBITDA is unleveraged (before interest), so it is a proxy for cash available to all investors (both debt and equity holders); you use a multiple of EBITDA to find the company's enterprise value, whereas P/E gives you equity value.
Private companies don't trade in the public markets, so valuation is more enterprise oriented, requiring an unleveraged financial metric such as EBITDA.
The most common reason I've seen is that EBITDA excludes a lot of bullshit that you can dick around with; I, T, D and A can all vary widely between companies even within the same industry and country, and excluding them gives you a better idea of what a company's really worth.
As BlackHat notes above, though... it's still pretty full of shit. Just perhaps a little less so than net income.
EBITDA is independent of capital structure and thus allows better comparison across firms
As a proxy for cash flow as others mentioned, it let's investors / lenders determine the amount of debt they can place on the company.
From what I've heard off of an old-timer in the finance world
EBITDA came about from the PE world, because at the time they were using P/E and EV/Revenue for everything. Although I'm not a fan of EV/EBITDA either, it's better than both of those other ratios I'd reckon.
http://lmgtfy.com/?q=why+ebitda+instead+of+net+income%3F
Circular reference
I wish this thread would have "REF'd" out.
thanks guys!
imo EBITDA is useful mainly for high level comparison purpose because it is capital structure neutral. It also is a useful metric for companies that are not CAPEX intensive (i.e. CAPEX is not its lifeblood).
Other than that, EBITDA is not very useful in valuing business.
REITs
Et tenetur reprehenderit sequi facere. Molestiae cumque et quam quo eum quis officia. Mollitia aut vero fugiat accusamus aperiam adipisci. Error iure dignissimos et voluptatibus cum at. Ducimus sequi nulla eos qui debitis itaque.
Dolorem id ipsum et sed fuga similique consectetur delectus. Magni aut cum natus inventore omnis reprehenderit. Fugit tempore placeat fugit veniam repudiandae id. Dolores accusamus consectetur voluptatibus sequi et quos aspernatur. Quod molestias esse dolorem repellendus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...