EBITDA as price multiple

Dreary Wrote: ------------------------------------------------------- > A good tip for the real exam is to look up the > question as you read the choices to make sure it > is asking true or false. Yep…thanks dreary!

Piss poor question. A may be the “correct” answer, but EBITDA is NOT a measure of cash flow. There is no regard for changes in working capital, taxes paid, cap ex, etc… Also, what is the numerator? Price would not be correct as it only reflects the market value of equity, but EBITDA is a measure of earnings available to all suppliers of capital. It should be Enterprise Value.

yes, but it is generally used as a cash flow measure, so are the various free cash flow metrics…using adjustments does not invalidate the measure.

i think im in trouble. EBITDA is generally used as measure of cash flow?

if you assume that the effects of accrual accouting methods are not significant and relax the impact, EBITDA can be used as a quick estimator of operating cash flows. EBITDA essentually equals Sales - COGS - operating expenses which is earning before you pay Interest and Tax and remove the non cash expenses of Depreciation and Amortization.

ryanwtyler Wrote: ------------------------------------------------------- > i think im in trouble. EBITDA is generally used > as measure of cash flow? Yes indeed.

from investopedia: "A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company’s earnings. When using this metric, it’s key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA. "

btw: that was in support of your message, not arguing it.

you’re right, it’s not a perfect measure, but works sometimes.

ryanwtyler Wrote: ------------------------------------------------------- > from investopedia: > > "A common misconception is that EBITDA represents > cash earnings. EBITDA is a good metric to evaluate > profitability, but not cash flow. EBITDA also > leaves out the cash required to fund working > capital and the replacement of old equipment, > which can be significant. Consequently, EBITDA is > often used as an accounting gimmick to dress up a > company’s earnings. When using this metric, it’s > key that investors also focus on other performance > measures to make sure the company is not trying to > hide something with EBITDA. " I think that’s dumb. Good thing they pointed out that if we leave out depreciation, we won’t recognize expenses connected with, uh, depreciation.

wyantjs is on to it. EV/EBITDA is the preferred metric. http://moneyterms.co.uk/ev_ebitda/