Mergers, Acquisitions, Divestitures, and Other Restructurings. Paul Pignataro
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СКАЧАТЬ If a company produces other income, it should not be represented as part of EBITDA, and other income should be listed below our EBITDA total. The argument here is that although it is a part of the company's profitability, it is not core enough to the operations to be incorporated as part of the company's core profitability.

      Determining whether to include other income as EBITDA is not simple and clear-cut. It is important to consider whether the other income is consistent and recurring. If it is not, the case can more likely be made that it should not be included in EBITDA. It is also important to consider the purpose of your particular analysis. For example, if you are looking to acquire the entire business, and that business will still be producing that other income even after the acquisition, then maybe it should be represented as part of EBITDA. Or maybe that other income will no longer exist after the acquisition, in which case it should not be included in EBITDA. As another example, if you are trying to compare this business's EBITDA with the EBITDA of other companies, then it is important to consider if the other companies also produce that same other income. If not, then maybe it is better to keep other income out of the EBITDA analysis, to make sure there is a consistent comparison among all of the company EBITDAs.

      Different banks and firms may have different views on whether other income should be included in EBITDA. Even different industry groups' departments within the same firm have been found to have different views on this topic. As a good analyst, it is important to come up with one consistent defensible view, and to stick to it. Note that the exclusion of other income from EBITDA may also assume that other income will be excluded from earnings before interest and taxes (EBIT) as well.

      Let's assume in our car example the other income will be part of EBITDA.

      Notice we have also calculated EBITDA margin, which is calculated as EBITDA divided by revenue.

      Depreciation and Amortization

      Depreciation is the accounting for the aging and depletion of fixed assets over a period of time. Amortization is the accounting for the cost basis reduction of intangible assets (e.g., intellectual property, such as patents, copyrights, and trademarks) over their useful lives. It is important to note that not all intangible assets are subject to amortization.

      EBIT

      EBIT is EBITDA less depreciation and amortization. So let's assume the example car company has $8,000 in D&A each quarter.

      Notice we have also calculated EBIT margin, which is calculated as EBIT divided by revenue.

      Interest

      Interest is composed of interest expense and interest income. Interest expense is the cost incurred on debt that the company has borrowed. Interest income is commonly the income received from cash held in savings accounts, certificates of deposit, and other investments.

      Let's assume the car company has taken out $1 million in loans and incurs 10 percent of interest per year on those loans. So the car company has $100,000 in interest expense per year, or $25,000 per quarter. We can also assume that the company has $50,000 of cash and generates 1 percent of interest income on that cash per year ($500), or $125 per quarter.

      Often, the interest expense is netted against the interest income as net interest expense.

      EBT

      Earnings before taxes (EBT) can be defined as EBIT minus net interest.

      Notice we have also calculated EBT margin, which is EBT divided by revenue.

      Taxes

      Taxes are the financial charges imposed by the government on the company's operations. Taxes are imposed on earnings before taxes as defined previously. In the car example, we can assume the tax rate is 35 percent.

      Net Income

      Net income is calculated as EBT minus taxes. The complete income statement follows.

      Nonrecurring and Extraordinary Items

      Nonrecurring and extraordinary items or events are income or expenses that either are one-time or do not pertain to everyday core operations. Gains or losses on sales of assets or from business closures are examples of nonrecurring events. Such nonrecurring or extraordinary events can be scattered about in a generally accepted accounting principles (GAAP) income statement, so it is the job of a good analyst to identify these items and move them to the bottom of the income statement in order to have EBITDA, EBIT, and net income line items that represent everyday, continuous operations. We call this “clean” EBITDA, EBIT, and net income. However, we do not want to eliminate those nonrecurring or extraordinary items completely, so we move them to the section at the bottom of the income statement. From here on out we will refer to both nonrecurring and extraordinary items simply as “nonrecurring items” to simplify.

      Distributions

      Distributions are broadly defined as payments to equity holders. These payments can be in the form of dividends or noncontrolling interest payments, to name the major two types of distributions.

      Noncontrolling interest is the portion of the company or the company's subsidiary that is owned by another outside person or entity. If another entity (Entity A) owns a noncontrolling interest in the company (Entity B), Entity B must distribute a portion of Entity B's earnings to Entity A.

      Net Income (as Reported)

      Because we have recommended moving some nonrecurring line items into a separate section, the net income listed in the previous example is effectively an adjusted net income, which is most useful for analysis, valuation, and comparison. However, it is important to still represent a complete net income with all adjustments included to match the original given net income. So it is recommended to have a second net income line, defined as net income minus nonrecurring events minus distributions, as a sanity check.

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