PURE Rating performs EBITDA margin analyses for all companies up to a total period of 10 years
Small and private investors often use only the price-earnings ratio (PER) as an analytical tool, they buy qualitatively safe, but usually 20 to 30 percent more expensive. This reduces your profits and according the value investing strategy also the Margin of Safety.
Companies often hide their profits in the income statement and balance sheet because they need reserves for the future. This falsifies the PER. The PER generally reacts late, while investors who also consider other company data are already invested in those equities. This happens often in reversals upward.
More professional investors use other indicators amd company data, such as the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
What is hiding behind the EBITDA?
Take the annual net profit of a company, and adjust it by adding the
interest charges (interest), corporate taxes (taxes), depreciation
and intangible assets (amortization) and subtract the attributions.
Companies often transfer their profits and losses within their subsidiaries. For this they charge interest, whereby these credit transactions are not part of their core businesses, unless they are a bank. Therefore, an adjustment is performed again to be able to make a better estimate of the validity of the company’s core business.
Corporate taxes are a position that might also be transferred to a subsidiary where the taxes are currently the cheapest. Corporations like to set up subsidiaries in low-tax countries in order to increase the profits where they are least costly at the same time.
Therefore we have to adjust the company’s earning numbers again by adding the taxes back to the profits. Then it does not matter what strategy the top management pursues.
Depreciation. Even with this position not only companies like to play plenty, but also politicians. Thus depreciation periods of capital equipment are consequently changed by the government to influence economic cycles. So in times of crisis the government can stimulate their economy by shortening depreciation periods – thus giving companies an incentive to increase investments.
Consequently also an adjustment is performed to get a better key figure for a company’s profitability.
Therefore, your investment decisions should never be made solely on the basis of the price-earnings ratio (PER). Consequently you should better take the EBITDA into account as well as the methods of value investing and technical analyses.
This all sounds very complicated and elaborate – it is actually.
But do not worry: We do the calculation for you and you can select the stocks with the best future prospects. The solution for this is EBITDA margin.
The EBITDA margin is a ratio of EBITDA to the company’s revenues. Thus we derive the amount of earnings before interest and taxes, etc. on a company’s turnover given in percent. Consequently, the profitability of a company can be assessed.
- Target: > 10% , depending on the industry
In other words, in the example of 10% that would mean: of each euro revenue, 10 percent of profit before tax and amortization remain for the company.
- EBITDA is free of depreciation influences. The international comparison of the profitability of companies will be simplified so and more expressive.
- The effects of different forms of financing are neutralized.
- Thus you can better decide in which company you would like to invest in.
- By help of the EBITDA margin calculation you will be able to select a stock with the best future chances.
As a subscriber of one of our market letters you will be able to call up the EBITDA margin analyses in the web, updated daily, clearly displayed as a table and a chart for each company, immediately available.