Oana Labes, MBA, CPA on LinkedIn: #entrepreneur #finance #business | 54 comments (2024)

Let me spot on two of significant limitations of EBITDA: Financial Engineering & Overlooking Debt ServiceEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is often celebrated as a go-to metric for assessing a company's operational profitability. However, while EBITDA can provide valuable insights, it's essential to recognize its potential pitfalls.🔍 Financial Engineering: A key weakness of EBITDA lies in its susceptibility to financial manipulation. Companies can engage in financial engineering, using various accounting strategies to inflate their EBITDA. This can create an illusion of better operational profitability than what truly exists. Therefore, it's always crucial to delve deeper into the financial statements and not rely solely on EBITDA.📉 Overlooking Debt Service: EBITDA does not factor in interest payments or debt service obligations. A company might have a strong EBITDA but could be burdened by significant debt service commitments, making it potentially vulnerable in the long run. Ignoring this aspect might provide a rosy but misleading picture of a company's financial health.In conclusion, while EBITDA can serve as a useful metric, it should never be the sole determinant in evaluating a company's performance or value. Always consider it in conjunction with other financial indicators to gain a holistic understanding of a company's health.Remember, in the world of finance, it's always best to look beyond the surface!

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What do you think based on your accumulated experience!!

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Excellent points on EBITDA...all 10 are critical in evaluating companies not only from a senior debt perspective, but also a valuation standpoint.

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EBITDA (and Ebitda margin %) is amazing and falling in love indicator, but need to be read in a complex frame structure. A clear decalogue example thanks to Oana Labes, MBA, CPA, not to be satisfied to be curious to understand deeply.

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It should be used in conjunction with other financial metrics to gain a more comprehensive understanding of a company's financial health and prospects. Investors and analysts should be aware of its limitations and carefully consider the context in which it is applied.

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Is EBITDA the same as Free Cash Flow? Credits (Oana Labes)(https://lnkd.in/dQjd69Ng)Not at all.1️⃣ EBITDA is not a GAAP metric so everyone calculates it however they like.Then they try to persuade you to buy into their formula.2️⃣ EBITDA implies that all net income translates into cash the same way, ignoring non cash expenses and working capital changes.3️⃣ EBITDA does not consider the amount of required reinvestment in fixed assets.At a minimum these should cover maintenance CAPEX and roughly match non-cash depreciation expense.4️⃣ EBITDA implies that the company will first use available cash flows to repay debt.In fact it could distribute it all to the shareholders before any debt payments are made.5️⃣ EBITDA doesn’t say anything about the quality of earnings, which could be poor due to aggressive revenue and expense recognition policies.🎯 If EBITDA is flawed and so far off cash flow, we need cash flow metric to replace it.What about 𝗙𝗿𝗲𝗲 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 (𝗙𝗖𝗙)?☑️ This is the cash remaining in the business after considering cash outflows that support operations (OPEX + working capital) and maintain its fixed capital assets (CAPEX).☑️This is also the cash flow available for the payment of debt obligations (hence why it's called Unlevered Cash Flow or Free Cash Flow to the Firm FCFF).☑️ Free Cash Flow (FCF) Formula= Operating Cash Flow +/- Changes in Fixed Assetsor=EBITDA - Interest - Taxes - Working Capital - CAPEX☑️ Advantages of Free Cash Flow:✅ Easy to calculate✅ Available to both capital providers and borrowers✅ Resolves some important EBITDA flaws and accounts for both CAPEX and cash consumed by sales growth or working capital efficiency losses☑️ Limitations of Free Cash Flow:❌Assumes all CAPEX is a required investment, despite the fact most companies have an annual mix of replacement and growth CAPEX❌Overstates CAPEX in the year of acquisition and understates it in subsequent years❌There is no standardized calculation of Free Cash Flow so it’s important to check with your banks or investors for their definitions❌ Can be manipulated just like so many other accounting metrics. A company that wants to increase free cash flow can simply under-invest in fixed assets.

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Superb 5 alternatives to EBITDA, reflecting that finance is dynamic to the needs of financial performance analysis. While investors need to understand the value added of their investment choice, the banks have interest to measure the repayment capacity of their debtors.

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Know the ins and outs of EBITDA.

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Demystifying Adjusted EBITDA: Insights and Analysis StrategiesHello Finance Enthusiasts!Today, I'm thrilled to delve into a concept that stands as a cornerstone in the world of financial analysis – Adjusted EBITDA. Accompanied by an insightful infographic, we aim to not only explain this concept in depth but also to arm you with practical tips and tricks for effective analysis.What is Adjusted EBITDA?EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a widely used metric to gauge a company's operational efficiency and profitability. Adjusted EBITDA takes this a step further by normalizing earnings, filtering out the noise of non-operating expenses, one-time costs, and other anomalies to provide a clearer picture of a company's operational performance.Why Adjusted EBITDA MattersComparability: It allows for a more apples-to-apples comparison between companies by removing the effects of financing decisions, accounting methods, and tax environments.Investment Insights: Investors often use Adjusted EBITDA to assess potential investment returns, valuing companies based on their core operational performance.Operational Efficiency: It helps stakeholders understand the operational profitability and efficiency of a business, independent of external factors.Tips and Tricks for Analyzing Adjusted EBITDANormalization Is Key: Carefully identify and adjust for non-recurring items, such as one-time sales, unusual expenses, or irregular income.Understand the Adjustments: Not all adjustments increase EBITDA. Be meticulous in distinguishing between adjustments that add back expenses versus those that should be subtracted.Use as a Comparative Tool: When analyzing companies within the same industry, use Adjusted EBITDA to compare operational efficiencies. However, be mindful of the differences in what companies choose to adjust, which can affect comparability.Consider the Context: Always consider Adjusted EBITDA within the broader context of the company's financial health, including its debt levels, cash flow, and revenue trends.Look Beyond the Numbers: While Adjusted EBITDA can provide valuable insights into a company's operational performance, it's not a measure of cash flow or profitability. Analysts should use it alongside other financial metrics for a comprehensive analysis.By mastering Adjusted EBITDA, finance professionals can unlock deeper insights into company performance, enhance investment analyses, and make more informed decisions.Let's continue the conversation - how do you utilize Adjusted EBITDA in your financial analyses? Any tips or insights you’d like to share?#AdjustedEBITDA #FinancialAnalysis #OperationalEfficiency #InvestmentAnalysis #FinanceProfessionals #BusinessAnalysis #LinkedInFinance

Good companies focus on free cash flow