Using tools like EBITDA and Blue Book

My boss just stepped around the corner and said, “HEY – can you write a quick column on EBITDA.”

Ah, sure – I’m just rating companies, looking at financial statements, checking scores and making sure our team is doing the same, but I can find time to write something up.”

I drop everything for our members, and my boss.

If you make it through this paragraph, you should be able to get through the column… there is “need to know” information at the end – EBITDA: also known as Earnings before Interest, Taxes, Depreciation, and Amortization.

That’s a lot packed into an acronym, and for many – including bankers, investors and analysts – find it to be a useful financial metric that speaks to a company’s operational efficiency and performance.

So what does it mean? Oftentimes, we are focused on what the bottom line says (net income), but it’s also important to look at what goes into it to see how the company is really doing, which is what EBITDA helps with.

By adding back certain nonoperational and noncash expenses, the aforementioned, one can see how effective a company is, if its cash flow is sufficient to manage its obligations and perhaps gain an understanding of the businesses value.

Certainly EBITDA has its limitations – In this week’s series “Demystifying EBITDA,” this question is asked, “For companies with significant interest expense, is it fair to ‘pretend’ the interest they are paying doesn’t exist?” and a quote from a familiar investor, Warren Buffett, once said, “does management think the tooth fairy pays for capital expenditures?”

From an analyst point of view, EBITDA is solid subject matter to peruse and ponder its meaningfulness, and though Blue Book doesn’t offer EBITDA or related ratios for users, we do certainly offer a variety of excellent financial metrics to assess performance and risk.

When working with a current business relationship, or considering to do business with a new account, be sure to take a look at the companies BBOS details page and check-out our “New” Performance Indictors.

A user will be able to quickly identify performance at a click of a button, and in particular, assess liquidity, solvency and operational effectiveness of companies with recent financial data.

To find out how to access our new “Performance Indicator” feature, which also includes Trading Performance detail, complete Rating History & lengthier Score trend, contact our Customer Service or Rating Department for more information.

Or you can email us at info@bluebookservices.com and say “I want to try series 250” – we will follow up.

Bill Zentner is Vice President, Ratings Service for Blue Book