EBITDA

Is it possible to revealing how much operating cash a

company is generating with each taka of revenue earned?
Yes, it’s possible through EBITDA MARGIN analysis.

What is EBITDA margin?

The EBITDA margin measures a company's operating
profit as a percentage of its revenue.
HOW TO CALCULATE EBITDA
MARGIN?
BITDA Margin calculates the company’s earnings before interest,
tax, depreciation & amortization as a percentage of total revenue.

EBITDA stand for:

EB for Earnings Before
I for Interest
T for Tax
D for Depreciation
A for Amortization.
FEATURES OF EBITDA

 Always higher than the profit margin.

 Not regulated by GAAP.

 Higher the EBITDA margin, lower are a company’s operating

expenses.

 The rule is higher the EBITDA margin, the

lower the company’s operating expenses in
relation to the revenue.
WHY EBITDA IS SO IMPORTANT?
 Tells the cash profit of the year
 Effective measure to minimize risks.
 Evaluate cost cutting efforts.
 Useful in inflating financial performance.
 Understanding EBITDA calculation and evaluation is
important for business owners for two main reasons.
 EBITDA provides a clear idea of the company's value.
 It demonstrates the company's worth to potential
buyers and investors, painting a picture regarding
growth opportunities for the company.
WHY EBITDA IS SO IMPORTANT?
 EBITDA margins provide investors with a snapshot of short-
term operational efficiency. Because the margin ignores the
impacts of non-operating factors such as interest expenses,
taxes, or intangible assets, the result is a metric that is a more
accurate reflection of a firm's operating profitability.
 EBITDA is used by analysts and investors to compare the
profitability of companies by eliminating the effects of
financing and accounting decisions. It's considered capital
structure neutral and will not reward (or punish) a company for
how it funds its business (i.e. equity vs. debt).
GOOD SIDES OF EBITDA

 A “good” margin will vary depending on the industry. But, a

higher percentage is always good as it shows that the
company is easily paying its operating expenses.

 To determine a “good” margin, one must calculate

the metric for several years and then use the
average of those.

 It is also a useful metric to evaluate the

effectiveness of a company’s cost-cutting efforts.
DRAWBACKS OF EBITDA

 EBITDA excludes debt, companies often use it to cover up their

financial performance.

 It’s excludes non-cash expenses, capital expenditures, interest

on loans, and taxes, it fails to give a clear picture of the cash
flows & neglects WC changes.

 Moreover, a positive EBITDA does not always

mean that a company is generating cash.
Drawbacks of EBITDA

 It is not mandatory under GAAP. So, companies are free to

use their discretion in calculating EBITDA, often resulting in
biased numbers.
 Doesn’t reveal proper profits.
HOW ITS DIFFERENT FROM OTHER PROFIT
MARGINS?
 Basically, there are 3 profit margins to calculate. Gross profit
margin, net profit margin, operating profit margin. The
calculation of these profit margins is standardized, whereas,
COS. Use their own rules to calculate EBITDA.

 Net Profit margin considers all the expenses & EBITDA

doesn’t. Hence, net profit margin is widely used.
HOW DOES IT HELPS TO ANALYSTS?

Analysts use it to compare companies of different sizes in

different industries because it is shown as a percentage of
revenue. So, it helps in analyzing how much operating cash a
company is generating with each taka of revenue earned.
WHEN POSITIVE & NEGATIVE EBITDA
MARGIN OCCUR?
A positive EBITDA means that the company is profitable at an
operating level. it sells its products higher than they cost to make.
At the opposite, a negative EBITDA means that the company is
facing some operational difficulties or that it is poorly managed.

For More details: https://www.genequityco.com/insights/ebitda