EV EBITDA - HOW TO CALCULATE - PROS and CONS | Summary and Q&A

TL;DR

Enterprise Value (EV) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are widely used financial metrics. EV represents the total value of a business, including debt and equity, while EBITDA is a measure of a company's profitability. However, these metrics can be manipulated, volatile, and may divert attention from true shareholder value.

Key Insights

• 🥳 EV-to-EBITDA ratio is a commonly used metric for comparing companies, with 92% of analysts using it.
• 👨‍💼 EV represents the total value of a business, including debt and equity, while EBITDA measures profitability.
• ❓ Calculations of EV and EBITDA can be subjective and differ across analysts and data providers.
• 🧑‍⚕️ There are concerns that EV and EBITDA can be manipulated and may not accurately reflect a company's true financial health.
• 😒 Warren Buffett and Charlie Munger have criticized the use of EBITDA, emphasizing the importance of considering expenses like depreciation.
• 🥳 It is important to focus on fundamental earnings and future cash flows, rather than solely relying on EV and EBITDA ratios.
• 📼 Wall Street's reliance on EV and EBITDA may contribute to asset price inflation and fail to benefit the wider community.

Transcript

good day fellow investors I receive a lot of comments to discuss financial metrics and in this video we'll discuss one of the most used financial metrics that's evey Amita will discuss a bit of history where does the metric come from we'll discuss how to calculate it we'll discuss what are the issues in the calculation and then we'll discuss the pr... Read More

Questions & Answers

Q: How widely are EV and EBITDA used by analysts?

According to a recent study, 92% of analysts use the EV-to-EBITDA ratio as a market multiple approach in comparing companies.

Q: How is EV calculated?

EV is calculated by adding a business's market value, debt, minority interests, preferred equity, and unfunded pension liability, and then subtracting cash and equivalents.

Q: What does EBITDA represent?

EBITDA represents a company's earnings before interest, taxes, depreciation, and amortization. It is often used as a measure of a company's profitability.

Q: What are the limitations of using EV and EBITDA?

EV and EBITDA can be manipulated, volatile, and may divert attention from true shareholder value. They also do not take into account factors such as future cash flows and fundamental earnings.

Summary & Key Takeaways

• EV and EBITDA are popular financial metrics used by analysts in comparing companies. A recent study found that 92% of analysts use the EV-to-EBITDA ratio.

• EV is calculated by adding a business's market value, debt, minority interests, preferred equity, and unfunded pension liability, and then subtracting cash and equivalents.

• EBITDA is derived by adding interest, taxes, depreciation, and amortization to a company's net income.