EBITDA = Executive Bullshit Intended To Distract Attention

searcher profile

November 07, 2021

by a searcher in Los Angeles, CA, USA

Ebitda is a proxy to cash flow, a lot of people think EBITDA is valuing a business. No; valuing a business comes after than EBITDA.

Another metric paired with EBITDA is Multiples, which does not account for cash flow thus leading to overvaluations.

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commentor profile
Reply by an intermediary
from Wesleyan University in Granville, OH, USA
Use the right tool for the right job. I find both EBITDA and EV/EBITDA multiples useful for screening targets and comparables, especially for public companies (I know, not central to this forum) where there are at least accounting standards. Above the mean, why? Below the mean, why? It's not a perfect valuation tool, but it's useful. In large deals DCF is king and as much work needs to go into WACC, risk premium assessment, and forecast as into your FCF model. I definitely don't want to do a DCF on every comparable, it would be a waste of diligence resources. So, why the hostility? You don't hate a screwdriver because it can't loosen lug nuts.

For typical searchfund targets I believe the most relevant question is, 'What's it worth to me and my investors?' What does the buyer think they can do with it - improve operations, grow market share, expand into adjacencies? I believe the value to a searchfunder is as much in real options as in the current business. However, in the early screening, I'd ask for summary financials and among the metrics I want to see in the I/S are EBIT and/or EBITDA.
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Reply by a searcher
from Indian Institute of Technology, Madras in Austin, TX, USA
Well, Depreciation is a real cost. It is lower for companies with capital light business model (maybe software), and higher for capital intensive businesses (manufacturing). But, it is a Real cost. Just because cash went out at the beginning (purchase a equipment) and now there is non-cash depreciation cost, doesn't mean depreciation becomes an unreal cost of operating a business. Similarly, stock based compensation is a real cost to the company (usually talked in public markets). Just because it is not in cash doesn't mean it is not a cost. Think like this, if you don't compensate your employees by paying in stock, what is the alternative to keep them in the company? you pay more cash.
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