Erich Stolz

Building on a very successful International Management career in several corporations, Erich has concentrated on helping companies to provide the foundation to grow, turning around or restructure.  Read more...

Contact Erich via:

Contact Form
Become A Guest Blogger
Idea Box


Enter your email address:

Live Webinar


Search
Sunday
Nov032013

Top TEN Limitations of EBITDA

Top 10 Limitations of EBITDA

While many lenders, investment bankers and others involved in evaluating the financial performance of companies use EBITDA (earnings before interest, taxes, depreciation and amortization) as a cash flow measurement tool, it is important to recognize that EBITDA has its shortcomings. Here's the top 10 list of limitations of EBITDA developed by Moody's Investors Service.

 

  1. EBITDA ignores changes in working capital and overstates cash flow in periods of working capital growth.
  2. It can be a misleading measure of liquidity (quick access to cash).
  3. It doesn't consider the amount of required reinvestment - especially for companies with short-lived assets, whether it's cable equipment or trucks.
  4. It says nothing about the quality of earnings.
  5. It's an inadequate stand-alone measure for a company's acquisition multiples.
  6. It ignores distinctions in the quality of cash flow resulting from differing accounting policies - not all revenues are cash.
  7. It's not a common denominator for cross-border accounting conventions.
  8. It offers limited protection when used in indenture covenants.
  9. It can drift from the realm of reality.
  10. It's not well-suited for the analysis of many industries because it ignores their unique attributes.

PrintView Printer Friendly Version

EmailEmail Article to Friend

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
Some HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>
« | Main | Lessons For Healthy Companies From The Turnaround Trenches »