EBITDA and valuations--PE
I am creating a deck for a mock-proposal interview. Do groups ever buy stocks, leverage the fuck out of D&A and then use EBITDA for a sell off ledger? Isn't it obvious sellers loaded up on D&A and then sell the company? or is the fundamental thesis wrong?
I'm not totally sure what you mean, so apologies if I'm misunderstanding but:
1) Ultimately your levrage depends on cash flow, which isn't the same thing as EBITDA. If the company has negative cash flow, the company might be un-leverageable in the first place.
2) Any asset you sell will undergo thorough due diligence, including a QoE assessment. As part of that, the EBITDA will part carefully looked at, and if there's any earnings which seem to have been manufactured artificially (I'm not sure if this is what you mean so please let me know if I'm mistaken), buyers will just refuse to pay for them (so, like you say, maybe it's obvious).
Are you suggesting that someone might buyout a company, and inflate EBITDA through the D&A (I.e massive capex spend) to realize a higher exit price when valued on an EBITDA multiple?
as an inexperienced autistic wannabe-fund manager
yes. Was that stupid? If yes, please go in-depth why it was, ty
It’s not stupid but as explained when you buy an asset you carry out a financial due diligence, which means you hire a big4 to check the so called “quality of earnings”, which boils down to making sure that EBITDA is “right” - if it’s less than that, the buyer either pays less or doesn’t buy at all.
Lol, wouldn't they just value off an EBITDA - capex multiple then?
I DONT" KNOW but does my train of thought hold up to scrutiny? as in, does D&A at least raise up EBITDA?
increasing capex or DA doesnt increase ebitda. bro what am I reading ?
Hahahahaha it’s always funny when people get confused that I could have $5m or $5bn D&A but my EBITDA will still be the same
would you please explain?
aren't you wrong
You can artificially increase EBITDA by capitalizing an asset, for example, that you were previously leasing/renting. Fleet vehicles is an example of this. Instead of leasing fleet vehicles you could buy them and it would increase EBITDA by whatever the previous lease cost was dollar for dollar. Whether you finance them or buy in cash, the interest and depreciation would sit 'below the line' from an EBITDA perspective. Pretty specific example, though. As called out above, if you are doing this at any scale, a buyer will find this during diligence.
thanks!!! This explains what I'm asking for pretty well
Is there a strategic benefit to Deprecation being consolidated in-house, then? Or does it do nothing in the real world?
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