1.Can you kill the investment? Is there adult supervision at the company?
2. Is the company essential? Does it depend upon the kindness of strangers?
3. What can the company make? Reasonable profitability for owners?
4. How are owners paid? Distributions?
5. Management – honest in past and present?
6. Does accounting reflect reality?
7. Does the balance sheet match up with the income statement?
8. Catalysts – Buybacks? Misunderstood? Is enterprise having a big problem that is fixable? Everyone’s been burned by the stock so afraid to buy it.
9. Are there irrational fears of current headwinds?
10. Does the business have pricing power or unit growth?
11. Can you hold the investment for a long time & does it improve portfolio performance?
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rssAdvantages & Disadvantages of EBITDA
The Advantages of EBITDA
Although there is no silver bullet metric in financial statement analysis, nevertheless there are numerous benefits to using EBITDA. Here are a few:
- Operational Comparability: As implied above, EBITDA allows comparability across a wide swath of companies. Accounting standards provide leniency in the application of financial statements, therefore using EBITDA allows apples-to-apples comparisons and relieves accounting discrepancies on items such as depreciation, tax rates, and financing choice.
- Cash Flow Proxy:Since the income statement traditionally is the financial statement of choice, EBITDA can be easily derived from this statement and provides a simple proxy for cash generation in the absence of other data.
- Debt Coverage Ratios:In many lender contracts, certain debt provisions require specific levels of income cushion above the required interest expense payments. Evaluating EBITDA coverage ratios across companies assists analysts in determining which businesses are more likely to default on their debt obligations.
The Disadvantages of EBITDA (more…)