Evaluating Companies using EBITDA

Overview of EBITDA

EBITDA has been widely used by many investors as a metric to identify company’s earning without having to factor in financing activities or capital structures, tax implications and accounting activities.

EBITDA = Earnings before Interest, Tax, Depreciation and Amortization

What does EBITDA truly mean?

In laymen terms, every business has interest expense, tax expense and depreciation or amortization in nature. These four items are considered non-operating items which will distorts the actual company’s profitability. Since investors are only concern with the core business operations (i.e. whether it is profitable or not), excluding the non-operating items could allow us to compare a company’s business operation against its peers more effectively and helps to identify companies with better business operation because of the following:

Interest expense – Can drastically affect company’s profitability when comparing to another company that does not have any debt or implied interest rates.

Tax expense – Can change from different jurisdiction for example tax exemption for MDEC company in Malaysia or from country to country tax laws.

Depreciation & Amortization – Written expenses on paper that tells the age and amount of capital equipment or intangible assets.

So, taking account of the above non-operating items, does net profit truly represents the operating profitability of a company? It does if they are not in a capital-intensive business, no borrowings and free of tax (everyone loves this). In reality, every company are subjected to either interest expense, tax or depreciation/amortization.

Why do we use EBITDA?

As mentioned above, EBITDA is a way to focus on operating profitability as a single measurement of company’s performance. This metric is important when comparing similar companies in the same industries or companies operating at different tax brackets.

How do we use EBITDA?

Before using it, we need to know how to extract derived this metric from the Financial Report. I’ve picked Carlsberg Malaysia as our reference.

  1. Tax – In the Profit & Loss Statement, add Tax Expense to Net Profit which gives Profit before Tax.
  2. Interest Expense – Add any finance cost into ‘Profit before Tax’ shown below which gives us EBIT (Earnings before Interest, Tax).

Carlsberg Income Statement

  1. Depreciation & Amortization – In the Cashflow Statement, add any depreciation and amortization into the calculated EBIT in step 3 will gives us EBITDA.

Carlsberg Cashflow Statement


  1. To calculate Free Cash Flow by using EBITDA, simply deduct it with the ‘Acquisition of Property, Plant & Equipment’.

Carlsberg Cashflow statement

Enterprise Value (“EV”)-to-EBITDA

The calculated EBITDA based on Carlsberg FY 2016 Annual Report is RM 327 million. On 21st Feb 2017, Carlsberg’s Enterprise Value (will be covering at another article) stood at RM 4.1 billion as shown below. This gives Carlsberg’s EV/EBITDA ratio 12.6. But what does 12.6 represents?

Any financial ratio must always be used to compare against industry peers. For this purpose, I’ve analysed Heineken Malaysia and their EV/EBIT ratio stands at 6.5. Of course the lower ratio is better because we want to pay less for every RM 1 generated by the company. For example, if we were to value Carlsberg and Heineken, we will be paying RM 12.6 for every RM 1 earnings generated by Carlsberg and RM 6.5 for every RM 1 generated by Heineken. The good thing about EBITDA is that it removes the need to consider a company’s capital structure and only compares a company’s operating efficiency.

Comparison between Carlsberg and Heineken EBITDA


Besides EV/EBITDA ratio, it is also useful to identify EBITDA margin as it gives an insight where it breaks down operating profit as a percentage of revenue. This means that investor can understand how much operating cash is generated for every RM 1 earned and use this margin as a benchmark. In this example, the EBITDA margin for Heineken is 5% higher than Carlsberg. However, the drawback for this metric is that it can be deceptive because it does not consider the debt level of a company. Imagine if you have high borrowings with high interest payment (finance cost described above), your EBITDA will be over-stated which will translate into higher EBITDA margin. Ideally, I will use EBITDA margin if the company’s debt to equity is no more than 15%.

Does lower EV/EBITDA means undervalued?

As you know investing is an art and never easy to evaluate a company. What I want to highlight here is that, you should not jump into conclusion that Heineken is cheaper than Carlsberg just because their EV/EBITDA is lower. We need this extra step to judge whether Heineken is truly cheap enough.

Identifying the EBITDA growth is important as it shows whether a company has the potential to increase their earnings in future. As shown below, the EBITDA CAGR for Heineken is at 31% while Carlsberg at 8%. This means that Heineken’s EBITDA is expected to grow at a faster rate than Carlsberg. Which also means, the EV/EBITDA ratio of Heineken will be lower than Carlsberg at a much faster rate assuming EV stays constant.

By considering solely on EV/EBITDA and EBITDA growth as shown below, I will consider Heineken as a cheaper company and has higher upside potential to growth in near future.

Comparison between Carlsberg and Heineken EBITDA

EV/EBITDA and Growth

In a nutshell, investing is an art and investors should not develop a quick conclusion by referring to one financial metric but instead, leverage on multiple key financial ratios coupled with business & management understanding to evaluate a company.

If you would like to receive more articles about Investing 101, do subscribe to this website. You can also check out some of my past articles on REITs or get some investment ideas by browsing through my articles on companies analysis.

An equity investor and co-founder of Stocks Insights. Prior to this, he was attached with an International Bank in Private Banking segment serving sophisticated high net worth clients. He has also passed Certified Financial Planner's examinations during his engineering undergraduate degree.

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  1. Hi Norman,

    Thanks for your useful article, during the time i try to calculate the EBITDA, why my result is calculated differently.

    Carlsberg Year- 2016
    Profit Before Tax 283,843
    Finance Costs (Interest Expense) 7,067
    Finance Income (Interest Income ) 1,910

    Add Dep 32,123
    Amortized 1,581

    Total EBITDA 326524

    • Hey Grierson,

      It was good to know this article has helped you.

      If you noticed, there’s “Share of (loss)/profit of equity accounted associate, net of tax”. In this case we need to add this number as it is part of Carlsberg’s associate tax.
      What I suggest is to take “Results of Operating Activities” as EBIT. (please also note that finance income must be deducted, not added to PBT)

      EBIT = 294,056
      D&A = 32,123 + 1,581 = 33,704

      Sum these two up will gives you, EBITDA= 327,760 (why is this different from the figure shown above?)

      I dig up my sheets and found out that I round-down my D&A to 32,100 + 1,500 (for simple calculation). Which is why the figure in the article shows 327,656.

      Whether it is 327,656 or 327,760, the most important thing is to understand how to extract EBITDA from Annual Report and to make use of it during valuation.

      Hope this clarifies your questions.


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