Buildings will likely fail to remain competitive against peers over the long haul is . A useful contextual framework. it’s hardly a be-all and end-all calculation on its own. at least for equity investors. EBITDA was creat with an eye toward how much leverage a business could maintain — specifically. how much interest a company could afford to pay for given its current cash flows. This is highly useful information from a lender or private equity investor’s standpoint. but could lead to incomplete or errant conclusions for common shareholders. Another drawback to the EV/EBITDA valuation approach is that some companies have gotten more and more aggressive with the sorts of expenses they add back into their “adjust” EBITDA calculations.
All that to say that while
This was particularly prevalent with country email list tech stocks and (SPACs) over the past few years where folks were very generous in making adjustments to EBITDA. This likely help lead investors to give overly optimistic valuations to these sorts of businesses. Finally. some business. such as banks. in general should not be evaluat using EBITDA (nor EBIT). and therefore never valu according to an EV/EBITDA ratio. Banks make a large portion of their profits from the net interest spread. which is essentially interest income less interest expense. Ignoring (or adding back) interest expense would therefore unreasonably exaggerate the profitability view of a bank. Important: EV/EBITDA can be a great metric for analyzing a company’s underlying cash flow generation capabilities.
Special purpose acquisition companies
However investors should keep a close eye BY Lists on earnings as well. and make sure that report EBITDA results turn into shareholder value creation over time. What Types Of Companies Are Best Evaluat Via EV/EBITDA? The obvious answer would be the cable and telecom industry. as that is where the measure originat from in the first place. Telecom is a perfect use case as the firms involv tend to be among the most heavily leverag in the world. spending tens of billions of dollars to build and maintain their networks. That spending also comes with massive amounts of subsequent depreciation and amortization. Using EV/EBITDA to compare telecom firms allows investors to get a comparative analysis across different industry participants despite their vastly different levels of debt. fix assets. interest expense and so on.