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Perhaps someone here can refresh my mind on why people (often private equity types) center on EBITDA multiples for computing enterprise value, as opposed to EBIT or FCFF multiples? I understand EBITDA as a quick-and-dirty estimate of cash flow from operations (CFO), and is a reasonable approximation if you think the work involved in computing true CFO doesn’t give you much additional information. Nero Recode Patent Activation Crack there. What confuses me is why one would dismiss depreciation and amortization from a valuation multiple? For a company with few fixed assets, maybe this is defensible, but doesn’t PPE have to be replaced eventually?

Why would you use a multiple that ignores this? Is it just convention? Do we assume that every business in the same industry has the same PPE age and structure and therefore are comparable? Would love to hear from people who know more about this.

I think most people look at EBITDA then look at depreciation separately. As you said, EBITDA gives you a quick look at cash flows, then from there you can compare different companies’ depreciation on a stand-alone basis. So if two firms have similar EBITDA multiples, but one has significantly more depreciation I might find that attractive, but then I’d look at their capital structure and so on. EBITDA is just a little cleaner than straight-up earnings and allows you to break down the individual components further. This is an excellent question. The idea is that you need to compare on a apples to apples basis. Also, remember that depreciation and amortization are non-cash expenses.

Say you are comparing the valuation of a manufacturing company (heavy depreciation) to a consulting company (low depreciation.) It would be more appropriate to perform valuations on an EBITDA basis if you wanted to compare. See this as well: Why do analysts focus on EBITDA?

The Good EBITDA can be used to analyze the profitability between companies and industries. Ap Biology Seventh Edition Campbell Reece Notes Of A Native Son more. Because it eliminates the effects of financing and accounting decisions, EBITDA can provide a relatively good “apples-to-apples” comparison.

For example, EBITDA as a percent of sales (the higher the ratio, the higher the profitability) can be used to find companies that are the most efficient operators in an industry. The ratio can also be used to evaluate different industry trends over time. Because it removes the impact of financing large capital investments and depreciation from the analysis, EBITDA can be used to compare the profitability trends of, say, “heavy” industries (like automobile manufacturers) to high-tech companies. Download Craftsman 315.17461 Owners Manual Free. The accounting rules known as FAS 142, which eliminate the amortization of goodwill, bring operating income closer to EBITDA, but EBITDA continues to be a better measure of core operating profitability. The Bad EBITDA is a good metric to evaluate profitability but not cash flow. Unfortunately, however, EBITDA is often used as a measure of cash flow, which is a very dangerous and misleading thing to do because there is a significant difference between the two.