Ebitda
Profit before interest, taxes, depreciation and amortisation: a rough proxy for operating cash earnings before capital spending. Buyout prices and debt capacity are usually quoted as multiples of it.
Where you will meet it
Ebitda appears in 17 learning outcomes on the CFA syllabus. A few of them:
- Outline the main families of equity valuation model and what each gains or gives up
“Multiplier models apply a ratio such as P/E or EV/EBITDA from peers or history; they are quick and market-based, but only say whether a share is cheap relative to something that may itself be mispriced.”
- Contrast relative with absolute valuation models and give examples of each kind
“Relative valuation instead prices a share against similar assets, typically with multiples such as price to earnings or enterprise value to EBITDA, relying on the idea that similar assets should sell at similar prices.”
- Assess the effect on financial statements and ratios of a particular change in accounting standards, methods or assumptions
“Recognising leases on the balance sheet raises assets and debt, lowers asset turnover and, under IFRS where lease cost becomes depreciation plus interest, raises EBITDA and operating profit; under US GAAP an operating lease keeps a single straight-line cost in operating expense.”
- Apply valuation methods to companies undergoing corporate restructuring and explain the values that result
“Comparable company analysis applies peers' trading multiples, such as EV/EBITDA, to the target, giving a value without a control premium.”
Practise it
Practise ebitda until it is automatic: questions that explain every wrong option.
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