Another drawback to the EV/EBITDA valuation approach is that some companies have gotten more and more aggressive with the sorts of expenses they add back into their “adjust” EBITDA calculations. This was particularly prevalent with tech stocks and special purpose acquisition companies (SPACs) over the past few years where folks were very generous in making adjustments to EBITDA. This likely help lead investors to give overly optimistic valuations to . some business. such as banks. in general should not be evaluat using EBITDA (nor EBIT). and therefore never valu according to an EV/EBITDA ratio. Banks make a large portion of their profits from the net interest spread.
These sorts of businesses. Finally
The business could cease to function. depreciation country email list is not just an accounting consideration but rather a very real expense that comes with tangible consequences if ignor for long. Fam investor Warren Buffett highlight this point in his 2000 shareholder letter: “References to EBITDA make us shudder — does management think the tooth fairy pays for capital expenditures? We’re very suspicious of accounting methodology that is vague or unclear. since too often that means management wishes to hide something.” There can be cases where depreciation is a non-cash expense that isn’t necessarily recurring. Think of something like real estate. where a building is often written down significantly due to aging. even though the value of the underlying land and structure can retain its value and perhaps appreciate.
There are many such industries where
That said. in highly capital intensive Latest Bulk SMS industries where assets wear out quickly. one should use extra caution before trusting an EBITDA valuation ratio entirely in place of earnings. Another pitfall can come with companies that have a financial element. As mention above. banks should not generally be evaluat via EBITDA or EV/EBITDA. as the addback of interest expense would skew the true profitability picture. Paying interest is a core part of their business model in terms of attracting deposits to fund the bank. Recently. some FinTech companies report adjust EBITDA metrics to investors in lieu of profits. This was eyebrow-raising. since these firms often were. in fact. paying sizable sums of interest to attract capital to fund their underlying operations as part of the business model. It arguably makes little sense to exclude interest from profitability calculations in such a case. Bottom Line EV/EBITDA can be a useful metric.
