EBITDA and EBITDA margin

administrator — Mon, 19 Mar 2018 11:49:50 +0000

The EBITDA is a well-known financial metric. It is considered as the best approximation of operating cash flows and thus consequently a crucial indicator for managers, bankers, appraisers, analysts and other industry practitioners.

In other words, EBITDA gives you an indication of how much earnings before interest, taxes, depreciation and amortization the company makes with all the invested capital. Negative number is a red alarm for a company, meaning that the company is facing fundamental problems with its operations.

Normally practitioners consider normalized EBITDA only (management adjustments, pro-forma adjustments and other adjustments), since one off events may sometimes represent a significant role.

Due to fast and easy use of EBITDA, the metric is dominating the financial world. Its applicability makes it a #No.1 indicator. Furthermore, it is often used in relation with debt, value and performance indicators:

– Leverage: Financial obligation/EBITDA

This metric measures how does the debt relate to the ability of generating the operational profit. It can be argued that a leverage > 4 is not acceptable for banks anymore.

– Interest coverage: EBITDA / Interest expenses

This metric measures the ability of a company to cover its interest out of its operations. It is obvious that a ratio <1 is not sustainable.

– Value multiplier: Enterprise value/EBITDA (EV/EBITDA)

This metric measures how the market values the firm according to its ability to generate operational profits.

– Performance indicator: EBITDA / Total revenues (EBITDA margin)

This metric is a relative indicator and offers a great way to compare the company performance with its competitors.

EBITDA is further developed into EBITDAR and EBITDARM in cases where costs such as rents, restructuring fees and management fees represent a significant amount. These is especially typical for retail industry, REITs, hospitals, etc.

Nowadays more and more financial practitioners are aware of the underlying interpretational problems of EBITDA. The metric that overcomes the disadvantages of EBITDA is the economic value added model (so called EVA model). Even though the model as such is more advance, it relays on subjective assumptions related to the cost of capital calculation.

Are you interested in boosting your EBITDA? Check our performance improvement services or contact us directly!

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Case study: Preparing the niche industrial company for sale

administrator — Thu, 28 Sep 2017 18:47:20 +0000

Pain:

A highly specialized company referred to Consilue for guidance in the transaction or M&A process. The company holds one of the positions of a well-recognized global niche industry leaders. Different owners’ expectations resulted in a conflict of interests and a decision to form a consortium of sellers and sell the company to a new owner.

Addressing the pain:

After the in-depth interview with the client a preliminary valuation has been prepared. The client expected the transaction would have taken place in a price range higher than one estimated in the preliminary valuation. The main reason for the discrepancy was related to the cost of capital.

The probability of the successful transaction has thus been fairly modest.

According to the preliminary findings of the transaction advisory services, the client has been advised to prolong the planned timeframe of the M&A process in order to effectively prepare the company for sale.

So far the company already did some important steps forward in their strategy and business performance. For example, they have been focusing on the operations that truly add value to the client, they have developed a strategic alliance with their suppliers in order to provide the sufficient quality control procedures, they have set up an advanced planning system in order to efficiently schedule operations and thus maintain operational gaps and free capacities. However they haven’t yet approached the most critical issues i.e. the cost of capital.

Impacting the cost of capital namely by the following activities:

specific risk premium (addressing the key person and organisational risk) and
decreasing the beta (β) by addressing the seasonality effect of their operations

Rather than giving the client some vague recommendations, Consilue has prepared a well-structured long-term plan that has taken into account all measures required for the company in order that the owners would get their maximum outcome.

Results:

The client will most definitely be able to achieve the expected price range, once the company minimizes the cost of capital, assuming all other things being the same. Decreasing the cost of capital to boost the value of a company is easier and less risky way than impacting the profitability.

Client’s testimonial:

One should have in mind exit strategy from the day the company is established. Selling a company is a process. Not acting strategically is irrational. To rely on transaction advisory services in this view is a must.

Advisor’s thought:

Even though the advises given based on preliminary valuation have not been expected by the client in the first place, we have added a significant value by pointing out where and how the client can benefit by approaching to the M&A activities strategically.

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