Adjusted EBITDA used in practice
Question on adjusted EBITDA.
So, from my understanding, when doing trade comparatives in valuation, adjusted ebitda/ebit is commonly used because it is a good proxy for cashflow and it adjusts for non-recurring items.
However, I also understand that many analysts take adjusted EBITDA at face value. How would you assess or value a company that has positive adjusted EBITDA but negative net income, consistently year over year for a number of years. For whatever reason, there always seems to be some non-recurring item that reduces adjusted earnings to negative income every year. In this case, wouldn’t adjusted EBITDA be misleading, as I could give a good valuation based on industry earnings multiple, but the company is on the brink of bankruptcy because it doesn’t make money due to these one-time items happening all the time.
So what is best practice to make sure adjusted EBITDA doesn’t lead you down tunnel vision.
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