I want to compute HHI index using EBITDA as a measure of company size. The problem is EBITDA is sometimes negative, when I square each individual EBITDA and sum them up I came up with a number bigger than 1. How can I get around it? Is it at all possible to calculate HHI measured by EBITDA? Thanks.
Problem is the get the Herfindahl index you need the market share obviously you can’t get negative market share so you may have a hard time. Depending on the market here are a few of ideas. Use EBITDA like earnings yield use the reciprocal (Price/EBITDA) to (EBITDA/Price) that way you could at least rank them. Use the differences as a ratio and this should give you what I think you are looking for. Try using the lowest company as the absolute zero then add the rest of the EBITDA from that point to get mkt share etc. Smooth out the EBITDA by using some kind of 2,3,5 year or quarterly moving average.
^Agree with cpepin. Or You could simply ignore companies having negative EBITDA. Generally companies that have negative EBITDA are growing startups that anyways do not have any significant market share. They could be safely ignored without affecting HHI figure much.
How is HHI ususally calculated. Revenues?
^ Market Capitalization I think.