Ebitda

Summary Opinion
* The use of EBITDA and related EBITDA ratios as a single measure of cashflow without consideration of other factors can be misleading.
* EBITDA is probably best assessed bybreaking down its components into EBIT (earnings before interest and taxes) and depreciation and amortization. Generally speaking, the greater the percentage of EBIT in EBITDA, the stronger theunderlying cash flow.
* EBITDA is relevant to determining cash flow when a company is in extremis. EBITDA remains a legitimate tool for analyzing low-rated credits at the bottom of the cycle. Its use isless appropriate, however, for high-rated and investment-grade credits, particularly midway through or at the top of the cycle.
* EBITDA is a better measurement for companies whose assets havelonger lives—it is not a good tool for companies whose assets have shorter lives or for companies in industries that are undergoing a lot of technological change.
* EBITDA can easily be manipulatedthrough aggressive accounting policies relating to revenue and expense recognition, asset writedowns and concomitant adjustments to depreciation schedules, excessive adjustments in deriving “adjustedpro forma EBITDA,” and the timing of certain “ordinary course” asset sales.
* We find the ten critical failings of using EBITDA to be the following:
1. EBITDA ignores changes in working capitaland overstates cash flow in periods of working capital growth.
2. EBITDA can be a misleading measure of liquidity.
3. EBITDA does not consider the amount of required reinvestment, especially forcompanies with short-lived assets.
4. EBITDA says nothing about the quality of earnings.
5. EBITDA is an inadequate stand-alone measure for comparing acquisition multiples.
6. EBITDA ignoresdistinctions in the quality of cash flows resulting from differing accounting policies—not all revenues are cash.
7. EBITDA is not a common denominator for cross-border accounting conventions.
8. EBITDA...