It is, in a sense, an improvement in the P/E ratio. The EBITDA ignores taxation and adds back the interest and D&A to arrive at a more comparable metric.Īdding back interest means it also considers the company's debt, which means it is also taking the risk and leverage of the business into consideration.ĮBITDA = Net Income + Taxes + Interest Expenses + Depreciation & AmortizationĮBITDA is not a measure of cash flow instead, it is a measure of operating income, i.e., pre-tax income that adjusts for interest expense and depreciation and amortization expenses.ĮBITDA is mainly used as a relative value metric it can be used as a multiple like EV / EBITDA, EBITDA-to-sales, etc., Or a standalone metric to see year-on-year (YoY) or quarter-on-quarter ( QoQ) growth.ĮV / EBITDA: The enterprise value to EBITDA is probably the most valuation metric that uses EBITDA. The issue with net income is that it is susceptible to changes in the tax regimes, depreciation rates, and interest rates, making it difficult to compare companies with varying tax, depreciation, and interest rates. The EBITDA primarily replaces the net income as it is a better relative metric to value a company. The Earnings before interest, taxes, and depreciation & amortization ( EBITDA) is not essentially a cash flow metric but can be considered as one in certain circumstances. In this article, we will look at metrics that best represent the cash flows of a firm and how they are used in valuing the firm. ![]() On the other hand, cash flows are much more challenging to manipulate and give an idea of how much cash the business has left after its capital expenses and working capital requirements are considered. If a business is generating high cash flows consistently, it is safe to assume that it is a high-quality business.Ĭash flows are different from profits and are, in some cases, a better metric to judge a business, as the bottom line can be manipulated and is influenced by certain line items. In addition, some metrics like FCFF and FCFE are also used to arrive at an absolute value with DCF.Ĭash flows are one of the most critical metrics for the business they can be used to assess the overall quality of the business. However, some metrics are better suited than others to show how much cash flow a business generates.Īll of the metrics are used in ratio analysis as comparative metrics used to arrive at a relative value. ![]() ![]() The earnings before interest, taxes, and depreciation & amortization (EBITDA), cash flow (CF), free cash flow (FCF), free cash flow to the firm (FCFF), and free cash flow to equity (FCFE) are some of the finance professionals' most frequently used metrics.Īll of the metrics mentioned above showcase how much cash a business produces in one way or another.
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