EBITDA is one indicator of a firm's financial performance and is used as a proxy for the earning potential of a firm. 1) Explain why EBITDA can be used to analyze and compare profitability among firms in different industries and even in different countries. 2) Explain what is the EV multiple. And then explain why it is analogous to the payback period in finance or managerial accounting
EBITDA is one indicator of a firm's financial performance and is used as a
proxy for the earning potential of a firm.
1) Explain why EBITDA can be used to analyze and compare profitability among
firms in different industries and even in different countries.
2) Explain what is the EV multiple. And then explain why it is analogous to the
payback period in finance or
1) EBITDA is a good proxy for operating cash flows. It does not account the effect of capital expenditure and financing and hence is used as a good metric to compare the profitability across companies and industries. The EBITDA margin can be used to compare companies in the same industry within a country and across countries. Within the same industry, EBITDA margin is a good indicator of operational efficiency and economies of scale. In general, larger companies tend to have a higher EBITDA margin in the same industry with the same product offering. The EBITDA margin can also vary in different countries based on the availability of raw materials for production. A company in a country where raw material is abundant is likely to have a higher EBITDA margin. On the other hand, a company in a country where raw material needs to be imported might have a relatively depressed EBITDA margin. Therefore, EBITDA margin comparison for companies in different countries need to take these factors into consideration.
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