As an example, consider the diagram of the Metals and Mining industry based on the results of company reporting for 2016.

The value of the EV/EBITDA multiplier is displayed horizontally on the chart.

Without going into too much detail, EV/EBITDA measures how much annual EBITDA a company is worth.

But (unlike the popular P/E) EV/EBITDA takes into account more factors, in particular:

• the value of the company together with debts (P/E takes into account only the price of the company on the stock exchange, excluding the amount of debt);
• the amount of money in the company's account (P/E does not take into account how much money is in the company's account);
• Earnings before taxes, loans and depreciation (P/E includes net income before taxes, loans and depreciation).

That is why EV/EBITDA allows you to more accurately determine the real value of the company, how many years the investment pays off, and most importantly, the EV/EBITDA indicator allows you to most objectively compare companies in the same industry.

For example, the company MMK (Magnitogorsk Iron and Steel Works), in accordance with the diagram above, is worth 3.9 annual profits and this is the smallest EV / EBITDA in the industry based on the results of the companies in 2016. That is, when buying this business, it will pay for itself in 3.9 years. Or, if, relatively speaking, the MMK company costs 1 million rubles, then for the year the companies bring 256 thousand rubles of EBITDA profit. And if the price of the company on the stock market doubles, while the profit and debt ratios do not change, then the EV / EBITDA will be about 8, which is slightly higher than the industry average. Thus, we can state that the company is undervalued by the market and our task is to understand whether there will be factors that will increase the company's price on the stock exchange in the future.

The value of the NET DEBT/EBITDA multiplier is displayed along the vertical of the chart.

This multiplier shows how many years the company will pay off its net debt. MMK has no debt and is actively saving money to pay dividends, while Mechel will only be able to repay the debt in 8 years if EBITDA remains at the same level in the future.

We are talking about fundamental analysis, more precisely about comparative evaluation. This estimate is considered to be “fast”, it is able to give an instant, although less accurate compared to complex discount models. cash flows a picture of reality: to show how much the stock is undervalued / overvalued compared to competitors.

What are market multiples?

Imagine such a situation. You are comparing two public enterprises. They have a similar business, capitalization and financial performance, but a different number of shares. As a result, the price of one share in two cases can differ markedly. Does this mean that one paper is actually cheaper or better/more attractive than another?

Is not a fact. To get a more objective picture, it is necessary to bring the two companies to a common denominator. More precisely, compare the value of the enterprise with its financial performance (income, etc.). This approach will allow to get rid of the effect of a different number of shares in circulation, making it possible to find real discrepancies in the pricing of assets.

This is a comparative assessment or assessment by multipliers. Market multiples are usually understood as the ratio of the value of the enterprise and its income, cash flows, book value, etc. As a result, we have a profit or, for example, revenue per share, regardless of the size of the company or the number of securities in circulation.

Formally, a lower multiplier in comparison with analogues indicates an undervaluation and even “cheapness” of shares, and vice versa. It is possible to use multipliers to determine the target levels of securities. There are certain and very important nuances here. All this will be discussed later, but first we will consider the main types of comparative coefficients.

Types of multipliers

Profitable 1. Based on capitalization

P/E

It is the ratio of the company's capitalization and its net profit for the year, Price (Market Capitalization) / Net Income. (Further on, we will take the annual values ​​of income, etc. metrics in the formulas for calculating multipliers). In fact, we are talking about the ratio of price per share to earnings per share, Price / EPS. The most famous, accessible and intuitive multiplier, because earnings per share is often a key measure of the company's top management. P / E is often used to evaluate the market as a whole, that is, stock indices.

Despite its prevalence, this indicator has many disadvantages. First, it is not applicable to corporations with negative net profit, that is, unprofitable ones. Here it is necessary either to use forward multipliers (taking into account future income, which will be discussed later), or to smooth P / E taking into account the cycle.

It also makes sense to consider the multiplier taking into account profit adjusted for one-time expenses such as legal costs. In the case of startups in a deep "minus", you should pay attention to other indicators. Often, comparative evaluation is not applicable to them.

There is another important point. P/E does not take into account the difference in taxation and debt burden (capital structure) of the companies being compared. It turns out that two enterprises may look different in terms of P / E precisely because of the differences in these aspects of the business. The fact that the P / E of the compared enterprises differ greatly is not a reason to talk about underestimation / overestimation of one of them. Often, the P/E ratio is the most adequate for the analysis of bank stocks.

Schiller P/E

Or CAPE (P/E based on 10 years average inflation-adjusted earnings). It was developed by Nobel laureate Robert Shiller to assess the US stock market, or rather the S&P 500. Allows you to smooth out cyclical fluctuations in income. The indicator is usually compared with peak values, as well as the historical average. Schiller himself admitted that CAPE does not give the exact moment to enter or exit a position.

Shiller P/E chart of the S&P 500

P/S

The ratio of the company's capitalization and its revenue for the year, Price/Sales. Allows you to value companies with negative net income. Also abstracted from taxation, cost structure and capital. Less susceptible to accounting manipulations. In addition, revenue is a more stable indicator compared to net profit, that is, it is less dependent on momentary business fluctuations.

However, one must understand that the main criterion for a developed business is its profitability. This is the main disadvantage of P/S. In order to compare mature enterprises according to this criterion, at least a similar return on sales (margin) is often needed.

Profitable 2. Based on the value of the business

The total value of the business is represented by the EV (Enterprise Value) indicator, which demonstrates the value of the enterprise from the point of view of not only shareholders, but also creditors - all the assets of the enterprise. In a simplified form, EV is equal to the sum of market capitalization and net long-term debt, more specifically, capitalization + long-term debt - "cash" on the balance sheet (MC + Debt - Cash). “Cash,” or cash in accounts plus marketable securities, is deducted from debt because it can be used to pay off part of the debt.

It is customary to substitute EV in the numerator of multipliers based on the value of the business. The denominator of such ratios, as a rule, are income metrics, to which both shareholders and creditors are entitled. It is not logical to reconcile income after interest, in particular net income, with EV.

EV/EBITDA

EBITDA is earnings before depreciation, interest and taxes. Best of all shows the ability of the company to pay on loans. EV/EBITDA is a very popular multiplier.

It allows you to compare enterprises with different debt and tax burdens, that is, to abstract from the capital structure and taxation features. Depreciation is a kind of "virtual" deduction, so EV/EBITDA is especially useful when evaluating capital-intensive businesses.

EV/Sales

Has all the advantages and disadvantages of P/Sales. A less popular indicator than P/S, but logically more justified, because not only shareholders, but also creditors claim a part of the proceeds - in the end, not only dividends, but also interest are paid out of it.

Balance sheet

They represent a kind of “market value / face value” ratio. They show a kind of airbag in case of low (but positive) indicators. Most useful when evaluating banks that are highly dependent on the state of the balance sheet.

P/BV

The company's capitalization divided by the book value of equity (assets minus liabilities), Price/Balance Value.

P/TBV

A more conservative estimate, taking into account only tangible (tangible) assets, from which liabilities are deducted to calculate the denominator, Price / Tangible Balance Value.

Plus balance indicators: less subject to local fluctuations in the denominator. Minus: balance sheet estimate equity highly dependent on features accounting. If the balance multipliers are negative, they are of no practical use. A similar situation can arise with long-term losses, it is much less common than negative P / E.

Including cash flows

Cash flows show how much a company actually generated, regardless of accounting tricks in calculating net income. Thus, when calculating operating cash flow, net profit is adjusted for non-cash expenses (in particular, depreciation is added) and changes working capital.

P/OCF

Ratio of capitalization and operating cash flow, Price/Operating Cash Flow.

P/FCF

Ratio of capitalization and free cash flow, Price/Free Cash Flow. FCF refers to the difference between operating cash flow and capital expenditure. FCF is an excellent metric for assessing a company's ability to pay dividends and implement buyback programs.

There is even an indicator DIV / FCF - the level of dividend payments from free cash flow. The critical level is 70%, above it, payments are unstable. Another common metric in terms of dividend coverage is DIV/Net Income, which characterizes the level of payments from net income.

With the future in mind

The multipliers presented earlier are a look into the past. Often they give a distorted assessment, because business conditions change over time. What was “expensive” yesterday may turn out to be quite attractive in the future.

Forward

The same multipliers, but the denominator is substituted with an estimate financial indicators in future. Often we are talking about the consensus forecast of analysts for the next 12 months.

PEG

P/E adjusted for long-term growth. As a rule, it represents the ratio of P / E and the average annual growth rate of eps, predicted for the next five years. The multiplier is well suited for valuing fast-growing companies, it helps to smooth out the effect of a low base. PEG below 1 indicates a possible undervaluation of the stock. The more PEG exceeds 1, the "more expensive" paper looks.

Among the shortcomings of such multipliers is the possibility of an erroneous forecast of future indicators, which can lead to incorrect conclusions.

Industry (natural)

Industry specific. So for industrial companies, EV / Production and EV / Capacity are often used, taking into account the level of production and capacity. For oil and gas enterprises, an analogue is used, taking into account reserves.

Many innovative enterprises do not generate profits and operating cash flows. Specific indicators such as revenue per click for Internet resources are also suitable for evaluating them.

Such metrics are inaccessible, difficult to interpret, and may not take into account the specifics of the business of the compared enterprises. Often they mask the inability of the company to reach a profitable level.

How to use multipliers?

. Historical analogies

Often used to evaluate stock indices. The classic and most popular multiplier for this purpose is P/E. Shows how much the stock market is undervalued / overvalued compared to the historical average. Often index multipliers are compared with extremums.

It should be understood that such a comparison is not always fair, because the theoretically justified values ​​of the multipliers depend on the level of interest rates (inverse relationship), income growth rates (direct relationship), profitability of enterprises, that is, the stages of the business cycle.

In this regard, comparing individual stocks to historical levels can be even more questionable, as the company's business environment can change dramatically over time. In general, the following approach is adequate: if the financial position of a corporation remains unchanged or improves, and the multiplier is corrected, then this is a completely positive signal.

. Comparable companies

In this case, the company is compared with a sample of similar companies. The size, type of business, geographical features are used as a criterion for forming a sample. At the same time, the evaluated share is compared by multipliers with the median values ​​for the group of competitors.

Formally, the lower the multipliers of the company being valued in such a comparison, the “cheaper” it is, and vice versa. However, not all so simple. Cheaper doesn't mean more attractive. Cheapness can be fully justified by weak fundamentals. It is necessary to look at the return on sales and equity of the company, its debt load, and the expected rate of profit growth. If the fundamentals are positive and the multiples are low, then this is a reason to take a closer look at the papers.

. Building target levels

An extremely rough approach, however, allows you to get some guidance. To do this, the median value of the multiplier for the group of comparable companies is multiplied by the predicted value of the denominator. If we take an estimate of the financial indicator for the next 12 months, we will get a target for the year.

As a simplified version: We take some “fair” P / E value and multiply it by the forecast (our own, consensus or individual analysts) for eps at the end of the year, in 12 months. or next year. Here is the extremely rough target we are looking for. It is possible to use several multipliers and calculate a goal weighted by their significance.

Note that this is only an auxiliary method, an addition to the models for discounting cash flows and dividends, as well as technical analysis. Alternatively, check them out.

Examples

. Russian market

According to the P/E multiplier, the Russian stock market is the “cheapest” in the world: 7 against 15 in the group of emerging markets and 23 in the S&P 500. Structural problems of the Russian economy, dependence on oil, geopolitical risks affect, although a noticeable underestimation is still evident.

We chatted on skype with foreign colleagues about business performance analysis.

Friends often used the word EBITDA (how it sounds in Russian!).

I, a sinful deed, at first thought that they wanted to show off their knowledge of the literary Russian language, but then I remembered that I once heard about such an indicator of profitability with a funny name during my studies.

In order not to seem unprofessional, I had to update my knowledge on this issue with the help of the almighty World Wide Web, although in our country this indicator is not considered indicative, sorry for the tautology. The results were compiled into an article.

EBITDA

Definition

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) - earnings before interest, taxes and depreciation.

EBITDA shows the financial performance of a company, excluding the effects of the capital structure (i.e., interest paid on borrowings), tax rates, and the organization's depreciation policy.

EBITDA provides a rough estimate of cash flow, excluding such a "non-cash" expense item as depreciation. The indicator is useful when comparing enterprises in the same industry, but with a different capital structure.

EBITDA, in turn, is widely used as a component of various financial performance ratios (EV/EBITDA, return on sales, etc.). Investors rely on EBITDA as an indicator of the expected return on their investment.

Calculation

EBITDA = Profit (loss) before tax + (Interest payable + Depreciation of fixed assets and intangible assets)

There is a misconception that this indicator is calculated on the balance sheet of the organization. In fact, the EBITDA indicator can be calculated according to the “Profit and Loss Statement” (“Statement of Financial Results”), however, the amount of depreciation of fixed assets and intangible assets is additionally required, which is not contained in this reporting form.

Negative EBITDA indicates that the organization's activities are unprofitable already at the operating stage, even before paying for the use of borrowed capital, taxes, and depreciation.

EBITDA margin

The EBITDA indicator is also used to calculate the profitability (EBITDA margin):
EBITDA margin = EBITDA / Sales revenue

This ratio reflects the company's profitability before interest, taxes and depreciation, and, unlike EBITDA itself, is not an absolute, but a relative indicator.

Source: https://www.audit-it.ru/finanaliz/terms/performance/ebitda.html

EBITDA

The financial ratio EBITDA is used to determine the company's ability to meet its obligations. In addition, financial analysts use this indicator to determine the value of the business (in the EVA model).

EBITDA translates as Earning before interest, dividend, tax, amortization, which literally reads as gross profit before interest, dividends, taxes, depreciation.

For the correct calculation of EBITDA, you need financial statements that are made in accordance with IFRS standards ( international system financial reporting).

In other words, the EBITDA indicator shows the income of the enterprise, i.e. the cash that the company received in the reporting period. This metric is used to evaluate the return on investment in yourself.

However, this indicator has its drawbacks. It is impossible to calculate EBITDA in Russian reporting (RAS), as the formula was developed for reporting prepared in accordance with IFRS and GAAP.

An approximate calculation of EBITDA is as follows:

EBITDA = Profit from sales + depreciation charges

In other words, the indicator reflects the profit of the enterprise before tax and the cost of depreciation of fixed assets.

EBITDA is important for carrying out financial analysis. Along with EBITDA, EBIT (earnings before taxes and interest on loans), EBT (earnings before taxes), NOPLAT (net income minus taxes), OIBDA (operating income minus depreciation) are used in the analysis.

Source: http://finzz.ru/pokazatel-ebitda.html

What is EBITDA?

The calculation of EBITDA is quite simple - you need to add depreciation to EBIT.

Formula

EBITDA in Russia (in Russian practice) can be obtained as follows:

EBITDA = EBIT + Depreciation charges on tangible and intangible assets - Revaluation of assets

EBITDA is more popular among international investors and rating agencies than net income.

This demand for EBITDA is mainly due to three factors:

• The first factor is the difference in taxation systems, including income tax rates.
• The second factor is the differences in accepted methods and methods of depreciation.
• The third factor is the variation in the conditions for the provision of credit funds (terms, interest, etc.) by banking institutions.

These three factors find their cumulative expression in the amount of net profit received by the company, respectively, affect the EBITDA indicator.

Compare companies of the same specialization, but located in different countries Ah, in terms of net profit it would be incorrect. Comparability and objectivity can be achieved by eliminating factors of cross-country differences in taxes, loans and depreciation.

The use of EBITDA and ratios that apply EBITDA provides an opportunity to make correct comparisons and make objective investment decisions.

I would like to point out that the results largest companies The US, which is reflected in annual reports, is primarily measured by (1) the ratio of the company's share price to earnings; (2) cash flow; and (3) EBITDA. In Russia, the question is no longer how to calculate EBITDA.

All Russian companies whose shares are listed on foreign stock exchanges, or have foreign investors/creditors, or are planning an initial issue of shares, use these and many other indicators and coefficients for analyzing financial and economic information.

Such Russian companies include Gazprom, Surgutneftegaz, LUKOIL, FGC UES, Norilsk Nickel, Sberbank, Magnit, X5 RetailGroup, VimpelCom, MTS, Mail.ru Group, Gazpromneft, Rosneft, Tatneft, Novatek. Calculation of EBITDA in such companies is carried out constantly.

It should be emphasized that these and many other companies prepare financial statements in accordance with international standards (IFRS), respectively, calculate EBIDTA in accordance with IFRS.

Of the 100 largest Russian companies in terms of sales, almost half have switched to IFRS standards. Small and medium business in most cases, does not use EBIT and EBITDA indicators in its practice.

Moreover, even if this or that business structure has heard about these indicators, then how to calculate EBIT / EBITDA using Russian financial reports, this structure does not know. Few representatives of small and medium-sized businesses have switched to IFRS.

Keeping records in accordance with IFRS promises entrepreneurs significant advantages in terms of developing international cooperation (EBITDA is one of the most important indicators that foreign counterparties take into account), participation in seminars and trainings, the availability of foreign, cheaper, credit funds, as well as obtaining a more objective assessment own business.

Russian practice

In general, EBIT / EBITDA in Russian practice is only common among largest enterprises commodity sector.

Bulk Transition Russian companies all sectors of the economy and all sizes on IFRS will be the most important and necessary condition the influx of foreign investment into the country's economy, its qualitative growth and, ultimately, the improvement of the standard of living of Russians.

Pros and cons of the indicator

The use of EBITDA to evaluate a company's performance depends on the intended analysis.

Attention!

EBITDA hides a number of factors that are related to the volume of the company's activities, the volume of investments made, the burden on capital (debt obligations), as well as tax incentives.

However, the calculation of EBITDA does not take into account the cost of compensating for the depreciation of machinery, equipment and structures (depreciation).

This can have a negative impact, because the costs of maintaining the means of production one way or another have to be borne, albeit in a different time perspective. Accordingly, when analyzing long term, EBITDA should be replaced by OIBDA.

EBIT

EBIT is not just an abstract number. This indicator is the basis for business evaluation; the price that a potential buyer can offer for a particular business, multiplying EBIT by a certain multiplier.

In the West, for small and medium-sized enterprises, such a multiplier ranges from 3-5. In other words, good business can be valued at 3-5 times EBIT.

Given the importance of the indicator, it is advisable first of all to figure out how to calculate EBIT.

At the same time, it should be taken into account that there are certain differences in the calculation of EBIT between Russian enterprises using national accounting standards (RAS) and Western companies applying international standards (IFRS).

EBIT Formula

If we take international standards as the basis for calculating EBIT, then this indicator can be determined by subtracting direct production costs from revenue:

EBIT = Company Revenue - Direct Costs

Essentially, EBIT is the gross profit of a business. The calculation of EBIT in Russia (in Russian practice), that is, based on Russian accounting standards, is carried out taking into account such items as income tax refunds, extraordinary income and expenses, as well as interest received.

Accordingly, to obtain the western equivalent of EBIT, it is necessary:

1. determine the net profit of the enterprise;
2. identify the amount of net income tax by deducting from the amount of paid income tax the amount of tax that was reimbursed;
3. establish the amount of net interest by subtracting the amount of interest received from the amount of interest paid;
4. subtract from the amount of extraordinary expenses the amount of extraordinary income.

EBIT = Net income + Income tax expense - Income tax refunded + Extraordinary expenses - Extraordinary income + Interest paid - Interest received

The EBIT indicator is of particular interest to banking structures. Credit institutions are interested in high EBIT.

After all, this means that the company is able to attract and service loans and, under certain circumstances, can be exempted from paying income tax.

However, we should not forget that in this case the company will actually work for creditors, giving all the profit to repay loans.

Moreover, a positive EBIT by no means guarantees that such an important indicator of the company's activity as cash flow from operating activities will also be positive.

Due to the limited nature of this indicator, when evaluating a company, investors use another indicator - EBITDA (calculating EBITDA is slightly more complicated than calculating EBIT), as well as the OIBDA indicator, which is considered the most transparent.

Source: http://finance-m.info/articles.html?id=4

EBITDA - what is it?

EBITDA first came to prominence in the mid-1980s. EBITDA was used to analyze leveraged buyout (LBO) - the purchase of a controlling stake in corporations with a loan.

Financial EBITDA helped to quickly calculate whether these companies could pay interest on funded deals.

The reason for the emergence of financial EBITDA was that in the 1980s, the years when there was a buyout/acquisition fever on borrowed funds, many companies were paying unfair market prices for assets.

The EBITDA indicator made it possible to measure the profitability generated by the company. And knowing the profitability, the investor could judge whether it was sufficient to pay off the debt that had arisen or not.

This indicator should be used in combination with others, as it also has disadvantages, which will be discussed below.

Today, EBITDA is used by companies in all industries. The relevance of the indicator to use is very simple:

Quickly and easily calculated using open source information (accounting forms), gives the first "impression" of the business. It is partially affected accounting policy enterprises, and tax rates do not affect at all.

In the 1980s, no one thought about the further development of the absorbed enterprise, therefore its shortcomings (does not take into account the volume of capital investments and working capital necessary to increase activity) was leveled (was insignificant).

Attention!

Currently, EBITDA is used by many directors of unprofitable companies to divert the attention of shareholders from the negative results of their activities.

The indicator is good as a “first date” with a company, as well as for comparing companies from the same industry but from different countries. Financial EBITDA is a good measure of operating profitability, but not cash flow.

Unfortunately, EBITDA is often used as a measure of cash flow, which is very dangerous and misleading for investors.

This is something to be aware of because there is a significant difference between the two. Operating cash flow is the best measure for cash flow, but that's another article.

EBITDA is an abbreviation for Earnings before Interest, Taxes, Depreciation and Amortization, which translates as earnings before interest on loans, taxes, depreciation (amortization of long-term tangible assets) and amortization (intangible).

EBITDA does not represent net income, does not measure liquidity, and is not part of generally accepted accounting principles. Enterprises have the discretion to publish this figure. Although now more and more companies are using it.

This indicator is easily calculated according to International Financial Reporting Standards (IFRS), but we will also consider how it can be calculated using the financial statements of Russia and Ukraine.

The EBITDA formula for IFRS is:

EBITDA = EBIT + Depreciation + Amortization

EBIT = Revenue - Cost

Let's take a hypothetical look at the profit and loss for Company XYZ:

• Income Statement - the main financial declaration of income (an official document containing information about the income of its author, as a rule, for tax purposes)
• Sales Revenue - sales income
• salaries - wages
• Rent & Utilities - rent and utilities
• Depreciation - wear
• Operating Profit - operating profit
• InterestExpense - interest on loans (payable)
• Earnings Before Taxes - profit before taxes
• Taxes - tax
• Net Income - net income

To calculate EBITDA, we find the line items for EBIT ($750,000), depreciation ($50,000) and amortization (N/A) and then use the formula above:

EBITDA = 750,000 + 50,000 + 0 = $800,000

Since EBITDA is based on IFRS, the result of calculation according to Russian Accounting Standards (RAS) and Ukrainian Regulations (standards) of Accounting (UP(S)BU) will be approximate.

For Ukrainian standards

EBITDA \u003d F2 (2290 - financial result before taxation) + F2 (2250 - financial losses) + F2 (2515 - depreciation)

For Russian standards

EBITDA \u003d F2 (2110 - revenue) - F2 (2120 - cost) \u003d F2 (2100 - gross profit) - F2 (2210 - selling expenses) - F2 (2220 - management expenses) \u003d F2 (2200 - profit from sales) + F5 (5100 (10) - accumulated depreciation) + F5 (5200 (10) - accumulated depreciation)

Conclusion

A common misconception is that EBITDA represents cash income. EBITDA is a good measure of our profitability, but not cash flow.

Financial EBITDA also does not take into account the cash needed to finance working capital and replace old equipment, which can be significant.

The company can make the financial picture more attractive by touting EBITDA, shifting investors' attention away from high debt and ugly spending versus earnings.

Be careful: a company that doesn't pay its government taxes or service its loans won't stay in business for long.

Unlike adequate measures of cash flow, EBITDA ignores changes in working capital, the funds needed to cover day-to-day operations.

So, for example, if the debtor took the goods, and pays in a week, then the proceeds will be the cost of the goods sold, and in fact the money was paid by the seller from its working capital. Despite the critics, there are many who prefer this convenient equation.

The financial measure of EBITDA can be used as a "label" for estimating the cash flow to pay off debt on long-term assets such as equipment and other items with lifespans measured in decades rather than years.

In order for the EBITDA estimate to be accurate enough, first calculate the profitability. EBITDA can also be used to compare companies against each other and against industry averages.

Despite widespread use, EBITDA is not defined in GAAP - as a result, companies can report EBITDA however they wish. The problem with doing this is that EBITDA does not give a complete picture of a company's performance.

In many cases, investors are better off avoiding EBITDA or using it in conjunction with other, more significant measures. Lack of profitability is not a good sign of business health, regardless of EBITDA.

A good analyst understands these facts and uses the calculations accordingly to supplement his or her firm and individual estimates. EBITDA does not exist in a vacuum.

A bad reputation is more the result of overuse and misuse than anything else.

Just as a shovel is effective for digging holes but won't be the best tool for tightening screws or inflating tires, so the metric should not be used as a "one-size-fits-all" stand-alone tool for assessing corporate profitability.

This is a particularly valuable observation given that the calculation of financial EBITDA is not in accordance with generally accepted accounting principles (GAAP). EBITDA is one of the operational measures most used by analysts.

The EBIDTA metric allows analysts to focus on the results of operational decisions while leaving out the impact of non-operating decisions such as interest expense (funding decisions), tax rates (government decision), or large non-monetary items such as income and depreciation (accounting decision) .

However, EBITDA can also be misleading when applied incorrectly. The use of the indicator is especially unsuitable for firms burdened with a high debt burden or those who must continuously upgrade expensive equipment.

Last but not least, finances are like perfume – they smell good, but they taste…

Source: https://madgicbox.com/finansovie-pokazately/pokazatel-ebitda-chto-eto-takoe/

Should EBITDA be used when evaluating financial results?

The EBIDTA indicator is controversial in terms of the validity of its use. This indicator has been criticized a lot and is still being criticized, but the question arises: “Why is it still one of the most frequently used in the analysis financial results organizations?"

It is used by business leaders, shareholders, ordinary managers and almost everyone who comes across company reports.

In the article, we will briefly analyze the essence, meaning, main pros and cons of EBITDA, as well as simplest method its calculation according to Russian financial statements and scope.

What is EBITDA and how to calculate it?

In order to give a brief definition of EBITDA, it is enough to simply decipher and translate it.

EBITDA (from English - Earnings Before Interest, Taxes, Depreciation and Amortization) in translation means: income before interest, taxes and depreciation.

In the English wording, four indicators seem to be subtracted, in the Russian - only three. Where did the other one go?

The English have two words for depreciation: depreciation - depreciation of tangible assets and amortization - depreciation of intangible assets. We mean these indicators as a whole.

What is the essence of EBITDA and how to calculate it? In general, this value reflects the income received by the enterprise from its main operating activities.

This does not take into account:

1. the amount of investment in production (adjustment for the amount of accrued depreciation);
2. tax regime (adjustment for income tax).

As a rule, EBITDA is calculated by adjusting the net profit of the enterprise for the amount of interest receivable / payable, income tax, depreciation and other non-operating income and expenses.

But there is a second option for calculating this indicator, which is made using the formula: EBITDA = Revenue - Operating expenses (excluding depreciation costs)

The second option looks simpler, both from the point of view of calculations and from the point of view of understanding. This value gives us an idea of ​​how many kopecks of profit from the main activity the company received from each ruble received for the sold products / services rendered.

Popularity Secret

Why exactly EBITDA is very popular among executives, financiers and analysts?

After all, there is, for example, an indicator of operating profit, which differs only in that, when calculating it, operating expenses deducted from revenue include depreciation. Let's try to figure this out with an illustrative example.

Example 1. Suppose there are two confectionery manufacturers:

• manufacturer A - provides buns to the population of one microdistrict, producing an average of 1000 units. products per day. Company A has 1 small bakery with 5 employees. The bakery was purchased at the expense of the founders of the enterprise for 100 thousand rubles, there are no loans. The company is on a simplified taxation system, income tax is paid in the amount of 15% of net profit;
• Producer B supplies a small town with 10,000 buns a day. Company B has several workshops worth 500 thousand rubles. and 50 employees in production. The company took a loan in the amount of 500 thousand rubles. at 15% per annum with full payment in three years. With these funds, all production equipment was purchased. The company is on the general taxation system and pays a 20% income tax.

Calculate the financial results of both enterprises for the year. In this case, we will conditionally assume:

1. both manufacturers operate 350 days a year;
2. the cost of 1 bun for both is 1 rub.;
3. the amount of operating expenses for 1 bun - 50 kopecks;
4. equipment depreciation period for both companies is 5 years.

That is, the enterprises under consideration differ only in the scale of activities, sources of financing and taxation systems (Table 1).

From Table. Table 2 shows that the EBITDA margin of both companies is the same (0.5%), but the subsequent indicators differ: the operating margin of enterprise A (0.44%) is lower than that of enterprise B (0.47%) due to the relatively large depreciation charges.

However, the net profitability is higher due to the lower tax burden and the absence of loans. Of course, this example is highly simplified. For greater clarity, consider another example.

Example 2. Let's present in the table. 3 financial results of several leading food retailers in Russia for 2011.

Please note that the EBITDA margin of the O'Key and Magnit groups is the same, and the difference with other retailers is relatively small.

At the same time, the deviations of the operating and net profitability is noticeably higher and is more than 2% (see "Maximum deviation" in Table 3).

As an additional illustration, we can also take data on the Big Three operators for 2011 (Table 4).

In table. 4 significantly larger deviations occurred various indicators profitability. Nevertheless, EBITDA margins are the closest to each other. The maximum deviation for them is the smallest in comparison with other indicators.

The above examples clearly demonstrate the main advantage of EBITDA. It lies in the fact that with the help of this indicator it is possible to compare the financial results of various enterprises operating in the same industry.

At the same time, their size, debt load or the applicable tax regime are not important. Only the type of activity and operating results matter.

Who will benefit from this indicator? First of all, to external consumers of information: investors, analysts and all those who want to compare one company with others working in the same field.

Attention!

EBITDA margin is one of the main criteria by which you can determine whether company A is worse or better than company B.

From this point of view, this indicator is useful for evaluating one's own business and for internal consumers of information - financial managers, managers and shareholders of the analyzed organizations.

Hidden threat

Another reason why EBITDA has become widely used is that it excludes depreciation expenses. Depreciation is charged on the cost of fixed assets in accordance with approved norms.

For example, the initial cost of a car is depreciated, that is, written off as an expense, over three years.

This means that, having bought a car for 300 thousand rubles, we will write off its cost at 100 thousand rubles. in year. These 100 thousand rubles. will be shown in the income statement as an expense.

But in reality, this money is not spent anywhere, and we will not give it to anyone. For this reason, many consider depreciation to be a paper expense that is reported only on the books but is not actually spent.

Therefore, it turns out that EBITDA reflects the actual operating profitability of the enterprise.

Here lies the main danger of this indicator. No wonder one of his main critics is Warren Buffett, the famous American investor. He owns the phrase: “Do managers really think that the tooth fairy bears capital expenses?”.

What Mr. Buffett meant was that the income statement does not reflect the amounts spent on the purchase of assets - real estate, equipment, Vehicle and all that will be constantly used for several years.

That is, the investment activity of the company remains practically unattended. But almost all assets tend to age, wear out and lose value. And over time, old equipment must be replaced with new.

For example, if we are engaged in transportation, then we must keep in mind that in 3-5 years the cars will require major repairs or replacements.

Money to cover these costs should be set aside today. Otherwise, after the expiration of this period, it will be possible to close the enterprise.

It turns out that by ignoring depreciation, we deny the need to replace or overhaul our fixed assets in the future.

History knows many examples of bankruptcies of companies whose leaders erroneously or maliciously embellished financial results based on EBITDA.

Therefore, when using EBITDA, we must not forget that depreciation is not just a paper expense of an enterprise, but a real reflection of the need to update production assets(operating and net income are just as important, not to mention there are more effective indicators worth tracking).

Easy way to calculate

The EBITDA indicator has the right to life, despite such a significant drawback, if only in order to assess the company's success against the background of competitors (especially since it is not difficult to calculate this indicator).

In the Russian financial statements in general view it is calculated by adding to the profit from sales (line 2200 of the GTC) the amount of depreciation accrued for the reporting period.

For example, if the profit from sales for the half year was 1,000 rubles, and depreciation for this period was charged in the amount of 100 rubles, then EBITDA will be 1,100 rubles.

Unfortunately, the profit and loss statement under RAS does not indicate the amount of depreciation as part of operating expenses.

To find out, you will have to use either the appendix to the reporting, which may indicate the main expenses, or accounting transcripts.

Conclusion

Should EBITDA be used when evaluating the financial results of an enterprise? Perhaps there is no single answer, since everything depends on the goals of the analysis.

EBITDA does not take into account factors related to the size of the enterprise and the volume of investments invested in it.

It ignores the debt burden on the organization and the taxation system applied in it, and takes into account parameters related only to operating activities.

Therefore, this indicator is excellent for analyzing and comparing different enterprises operating in the same industry, as well as for assessing the net operating results of a company.

However, the calculation of EBITDA does not take into account depreciation expenses, which are almost impossible to avoid due to depreciation of machinery, equipment and other assets.

Ignoring depreciation can lead to a lack of money when you need to upgrade fixed assets. Therefore, EBITDA should not be used if the task is to analyze the organization's activities in the long term.

Based on these reasons, we can conclude that the concept of EBITDA should be used carefully, not forgetting to pay attention to other indicators of the profitability of the organization.

You should always remember that sooner or later there will come a time when the company will need to update its production capacity. And this, of course, will require money.

Source: https://www.profiz.ru/peo/12_2012/primenenie_ebidta/

EBITDA Calculation Formula

One of the indicators of financial statements is EBITDA (an abbreviation of the English name "earnings before interest, dividend, tax and amortization", which translates as "earnings before interest, dividends, taxes, depreciation").

In other words, the profit of the enterprise is taken as the basis, which is credited to the account even before it was taxed, depreciation deductions for the use of fixed assets were deducted, interest on loans or loans was paid, and dividends were accrued.

Such indicators make it possible to understand how effective the activity of the enterprise was during the reporting period, what amounts can be spent in the next period of time.

This information will be useful when planning expenses for self-financing, for compiling the company's budget. It will help to evaluate the profitability of investments and current investments in production.

It should be noted that reliable data will be obtained only when using extremely accurate accounting calculations, without using distorted facts. This is only possible if the accounting department of the enterprise complies with the requirements of IFRS.

Consider the formula for calculating EBITDA, compiled in case of compliance with the laws of IFRS and GAAP. The values ​​of the terms are taken from Form No. 2 p. 50

Net profit + income tax payments - income tax refunded + contingencies - unplanned income + interest paid - interest received + deductions for tangible and intangible assets - revaluation of assets = EBITDA.

Below is a calculation formula adapted to Russian reporting standards. This formula does not give an accurate result, since there are no initial data similar to foreign indicators. The values ​​of the terms are taken from the Form No. 5 p. 50

Income from sales of products + depreciation charges = EBITDA

The formula for calculating EBITDA may be required:

• If you are developing a start up project and preparing papers for consideration by potential investors.
• If you have taken out a loan and are trying to calculate whether your current income is sufficient to meet your scheduled debt repayments. This indicator reflects the solvency of the organization.
• This indicator is used by analysts and investors:
  1. for rate financial position and value of companies;
  2. to evaluate organizations trading among themselves companies on the stock exchange. The higher the ratio, the more likely the company is having difficulty paying its debt on time.

Comparing these indicators between organizations with the same type of activity, you can understand which company is more stable and successful.

EBITDA is an indicator by which one can judge the company's profit, regardless of external influences, for example, on the size of investments, on debt payments, on the taxation regime in a given region.

It shows the success and solvency of the company as a whole, in comparison with other similar organizations.

Here we are talking about fundamental analysis, more precisely about a comparative assessment. This assessment is considered to be “fast”, it is able to give an instant, although less accurate compared to complex discounted cash flow (DCF) models, a picture of reality: to show how undervalued / overvalued a stock is compared to competitors.

EV/EBITDA multiplier, which is the ratio of the company's value (Enterprise Value, EV) to its earnings before interest, income tax and depreciation of EBITDA assets (Earnings before interest, taxes, depreciation and amortization).

What is it for?

The EV/EBITDA ratio refers to the group of income multipliers and shows how long it will take for the company's profit not spent on depreciation and payment of interest and taxes to pay back the cost of acquiring the company. It makes it possible not only to compare the company with other enterprises from the industry and understand the undervaluation, but also useful for finding the terminal value of the company in the DCF model.

It is often compared to the P/E multiple, but unlike it, EV/EBITDA allows you to compare enterprises with different debt and tax burdens, that is, to abstract from the capital structure and taxation features. In addition, EV/EBITDA is especially useful in valuing capital-intensive businesses where depreciation is a significant item.

Calculation

You cannot find EV and EBITDA directly in the company's financial statements, so the calculation of the multiplier is more laborious than for the more common P/E, P/S or P/B market multiples. Sometimes management calculates EBITDA separately and uses it to visualize the financial position of the company, publishing it in presentations and press releases.

There are two main methods for calculating EBITDA: top-down and bottom-up. In this article, we will not dwell on this indicator in detail. All the most basic things worth knowing about him are presented in the material: EBITDA. What is it and how to count it

Now let's turn to the value of the enterprise (Enterprise Value, EV). It is, in fact, the sum market value capital (market capitalization) and the market value of the company's debt, minus any cash and cash equivalents (deductible, since when buying a company, its debt is also acquired, which can be repaid at the expense of its cash). It is financial debt that is taken into account in debt: long-term debt, financial leasing, and debt due within a year.

The market capitalization of a company is calculated by multiplying the share price by the number of shares outstanding.

Example

Let's carry out the calculation using the example of Lukoil. To begin with, we will calculate EBITDA for 2017. To do this, we will use the “Top-down” method, that is, we will add depreciation and amortization to operating profit for the period.

It turned out that EBITDA = 506.516 + 325.054 = 831.57 billion rubles. Now we need to find the value of the company. First, let's calculate net debt, that is, total debt minus cash and cash equivalents.

Net debt \u003d 56.297 + 485.982-339.209 \u003d 203.07 billion rubles. The market capitalization of the company as of August 30, 2018 was RUB 3,999.35 billion. Thus, EV = 203.07 + 3,999.35 = 4,202.42 billion rubles.

As a result, Lukoil's EV/EBITDA multiple is 5.05. That is, in order to recoup the value of the company, it will take almost 5 earnings before taxes, interest and depreciation. For comparison, here are the multiplier indicators for other Russian oil and gas companies.

We see that, relative to the industry average, Lukoil shares are undervalued. Let's pay attention to Novatek. It looks expensive compared to other companies. It is worth noting here that EV is also based on the attitude of investors, that is, the expected growth potential of the company and its financial performance. Therefore, a high EV/EBITDA multiple does not mean that Novatek is not attractive in the long term. For analysis investment attractiveness do not limit yourself to one multiplier, but use a set of indicators, including taking into account the growth rates of operating indicators in the future based on the investment program.

It is also worth noting that the multiplier should be used to compare companies from the same industry, because. Depending on the type of business of the company and its specifics, the multiplier indicators can differ markedly. Take, for example, retailers, namely Magnit.

Lukoil's EV/EBITDA is lower than Magnit's. But this does not mean that the shares oil company look more attractive. The fact is that the share of borrowed capital of retailers is higher than that of representatives of the oil and gas sector, which is reflected in EV. From this spread in the coefficients.

/ EBITDA is partly analogous to another P/E multiplier, as it is used for the same purpose - to estimate the duration of the return on investment. The calculation formula is already included in the name of the multiplier.

The advantage of /EBITDA over P/E is that the value of the multiplier does not depend on the capital structure of the company. EBITDA has less volatility compared to net income, therefore it allows you to more accurately evaluate the money generated by the company. For example, if a company conducts an additional issue valuable papers, then this automatically reduces earnings per share (EPS). And since EPS is the denominator of the P / E indicator, its decrease increases the value of the indicator, artificially inflating the company's attractiveness. The /EBITDA value in case of an additional issue remains unchanged.

Another advantage of the multiplier is that its value is not affected by the level of profitability of the company, therefore it is used for companies regardless of:

• level of debt. The amount of interest on liabilities is not taken into account in EBITDA, but directly affects the net income per share. The lack of debt capital is a minus for the company, but at the same time, the debt load artificially adjusts the P / E ratio;
• depreciation principle. Each company invests part of the profits in the renewal of fixed assets. But one company can write off depreciation for the year, the other - evenly over the period. With the same profit indicators, the P/E multiplier will be different, /EBITDA will be the same.

The disadvantage of the multiplier is the complexity of its calculation due to different accounting standards and approaches. Therefore, P / E is used for superficial evaluation and comparison. For the analysis of capital-intensive industries, where calculations can be significantly affected by depreciation charges, it is better to use EV / EBITDA.

There is no normative multiplier value - the smaller the ratio, the better. The indicator is compared across industries. If the multiplier is less than the industry average, the company can be considered undervalued. True, this is where the problem arises: where to find the industry average value of the indicator? If the EBITDA value can be found on the websites of many companies, and EV is calculated manually, then statistics on the sectoral value of indices, if any, cannot be called accurate. There is only one way out - to independently calculate the indicators of several companies in the same industry (the number of companies in the sample is at the discretion of the investor) and compare them with each other.

Conclusion. The EV/EBITDA indicator shows how long the money generated by the company, from which depreciation, taxes and liability payments are not deducted, is able to recoup investors' investments. The indicator is considered in dynamics and analyzed together with profitability indicators, financial stability and debt load.