I am looking at a research report on a home builder, in one of the emerging market countries. The business model is simple - build a large apartment block and sell it down to individual customers, flat-by-flat.
The report (done by a BB firm) mentions, that an important gauge of execution quality for a home builder is - EBITDA per square meter (or foot) - that it achieves historically.
Out of pure curiosity, in what way (if any), is simple EBITDA MARGIN worse than EBITDA per square meter? to assess the quality of execution for a developer.
In my view, ultimately, both measures assess the profitability of the developer.
Any informed advice would be greatly appreciated.
Just to clarify, when I say " EBITDA per square meter ", I mean per square meter/foot that is recognized as having been sold/transferred to the customer.
Look at it this way: the goal of using either EBITDA margin or EBITDA PSF is ultimately to allow you to figure out the profitability (where profit is defined as EBITDA) of a company based on a given input. For EBITDA margin the input is sales, for EBITDA PSF the input is square feet.
The question of which might be more helpful is based on which input you feel more comfortable projecting. For most operating businesses, you generally project out sales. Say for McDonald's, you might figure out what same-store growth will be over the next few years (factoring in GDP growth, pricing power, etc.) and how much additional top-line growth can be attained through new stores (or lost from closures).
For a homebuilder things are different. Sales don't typically grow linearly as they do with other operating businesses. Homebuilders have pipelines of developable land, and you'll look to that to figure out what volume of development they might have over the coming years, and will think about profitability from that angle. Also, you're trying to evaluate the profit from a particular development. As a developer, you can't just sell an unlimited number of units and grow by a percentage rate each year, you're capped out by the size of your lot and the buildable square footage. So in looking at the potential profit on a development deal, you'll want to determine the profit on each saleable square foot.
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