05.10.2010 13:54

COMMENTARY: EBITDA And Financial Leverage

EBITDA is a measure of profits. While there is no legal requirement, according to generally accepted accounting principles (GAAP), for companies to disclose EBITDA, it can be worked out and reported using information found in a company's financial statements. The earnings, tax and interest figures are found on the income statement, while the depreciation and amortization figures are normally found in the notes to operating profit or on the cash flow statement. The usual shortcut to calculate EBITDA is to start with operating profit, also called earnings before interest and tax (EBIT), and then add back depreciation and amortization.

The Debt-to-EBITDA ratio, or more common, the Net-Debt-to-EBITDA ratio (Net Debt being a company's interest-bearing liablities minus cash or cash equivalents), is very widely used by banks and investors as a dynamic measure of leverage because the classic definition does not account for the ability of a company to decrease its debt burden. Net-Debt-to-EBITDA is basically a measure of a debt's pay-back period. The longer the payback period, the greater the balance sheet risk.

A company considered to have low or high leverage in this context depends on the industry. While technology companies due to their volatile profit history tend to have low or even negative leverage, regulated businesses consider leverage in excess of 5 acceptable. Depending on the industry of interest users of the our stock screener should therefore also pay attention to the NetDebt / EBITDA criterium: http://www.valueexplorer.com/stockscreen/

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