Items below EBITDA
Hey there,
I hope you are doing great and enjoying the last days of the year.
We have talked a lot about EBITDA and the analyses until EBITDA. Why don't we consider the items below EBITDA? Items below EBITDA can “easily” be changed depending on the tax environment, the financing structure, and the asset base.
Nonetheless, I will talk about the items below EBITDA today. This helps understand what happens between EBITDA and net income.
Depreciation and amortization
Depreciation and amortization apply to fixed and intangible assets. The amount depends on the company’s asset management. Does the company own machines? Or does it use suppliers to manufacture them? Does it expense items or recognize them as assets? The accounting principles allow for fluctuations, i.e. depreciation for asset X can be over three to five years. Hence, the amount is also dependent on which time frame was chosen.
Interest
Interest expenses apply to bank loans or any other debt. Interest income from financial assets, e.g. the purchase of shares, is also reported here. This line item can be changed since the acquirer can choose its financial structure. Also, this line is indirectly analyzed in the net debt discussion.
Tax
Taxes relate to the income and corporate taxes that a company needs to pay. Also here, an acquirer can change the underlying tax structure.
Other aspects
- If the company is part of a larger corporation, it might have a P&L transfer agreement with the parent company.
Key takeaways
- Typically no operational figures but rather chosen strategically: which financing and which tax structure does the company want to install?
- These items can be changed rather easy via changes in the company’s asset management, financing, and tax structure
Further readings
Are EBITDA adjustments the game changer? Read here.
What's the link between a DD and a valuation? Read here.
How to analyze working capital? Read here.
Enjoy the holidays, the last days of 2021 and feel free to reach out if you have any questions.
Cheers,
Jan
Hi, I’m a creator
Hey there, I hope you are doing great. This is the third part of our working capital analysis. Trade working capital consists of inventories, trade receivables, and trade payables. Other items could also be classified as trade working capital. This is dependent on the company’s specific business model. The main goal is to understand what drives trade working capital and how it developed over time. There are several main analyses that you should conduct. Monthly working capital analysis...
Hey there, I hope you are doing great. A number is not always a number - that's the title of this insight. Much of my content circles around running certain analyses and asking questions. But let’s step away from the numbers for one moment. As important as being able to analyze the numbers is to understand where these numbers come from. In due diligence reports, this is often called the “quality of financial information”. This section assesses the quality of the data. It also shows...
Hey there, in the course of a due diligence, it is important to understand capex. This is the last step in the cash flow calculation to derive the free cash flow. The free cash flow is used in many valuation models to calculate the value of a firm. Capex stands for capital expenditure. It relates to investments into fixed assets, i.e. tangible and intangible assets. Two aspects matter in a due diligence. First, what’s the recurring level? And second, which portion relates to maintenance and...