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iv.                EBITDA

The EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) is the single most important financial ratio when it comes to representing the wealth generated by the operating cycle of a company, given its current industrial equipments (factory, tools, etc …).

Indeed, a close look at its breakdown will show you that it includes almost all the income and expenses incurred by the operations, with the exception of the D&A and provisions. Indeed, the D&A tells about the policy of depreciation adopted by the company, which is irrelevant when attempting to measure the wealth generated by the company given its current equipments. Also, provisions are about potential losses which are mostly linked to external hazard and to a certain extent cannot be influenced by the company’s efforts. Precisely, we can say that the EBITDA is the difference between operating income and cash operating expenses (D&A and provisions have no impact on the cash position of the firm: they are called noncash expenses).

You will pay particular attention to the evolution of the EBITDA margin (EBITDA/Total Sales) over time as it reflects the ability of your business to extract as much money as possible from the sales you are making. It therefore measures your ability to optimize your operations for a given investment profile (given equipments, tools, and D&A policy) and a given financial and fiscal structure.

Caveat: the EBITDA factor can be manipulated by accountants in different ways. For instance, the inventories can be overvalued in order to boost the EBITDA margin for the period. However, EBITDA is independent from the D&A policy adopted by the company and the largely suggestive provisioning policy. This makes EBITDA a much more robust indicator than the EBIT, which can be easily manipulated. This is also the reason why analysts would value a company based on multiples of its EBITDA (a point which will be developed later in section 6).