EBIDTA measures profitability, value

Wednesday, January 31, 2007

Q. What is EBIDTA and how can I use it to operate my company more efficiently?
A. One of the best ways to measure a company's operating success is by looking at the EBITDA (earnings before interest, taxes, depreciation and amortization). It is the measure of profitability before the non-operating expenses and non-cash charges are added to the profit and loss statement. EBITDA is easily calculated by adding back the items listed above, which are included in a company's profit and loss statement, to the net income or loss for the period.
The EBITDA is important to HME dealers because it can be used to calculate the enterprise value of a company--the value your company has to an acquirer. Many factors go into determining the true value of a company, but one of the more common methods for calculating the enterprise value is to apply a multiple to your EBITDA for a 12-month period. For dealers interested in maximizing the value of their company, measuring and improving your EBITDA is an important way of increasing the enterprise value. EBITDA can also be used to compare the profitability of companies in an industry. When calculated as a percentage of revenue, it provides a meaningful basis to compare companies regardless of size. EBITDA can also be used as an early indicator of cash flow from operations. While it isn't a complete cash flow measurement, it will indicate the level of cash that will be available to service your debt, make capital acquisitions and grow your company. Other things to consider when using EBITDA as a cash flow barometer are the rate at which you collect receivables and pay payables. If you are slow to do either, EBITDA may not be a true indication of cash flow.

HME Consultant Joe Haley is a partner with Healthcare Strategies.