negative EBITDA

[slourenco]

I’m calculating EBITDA margins (EBITDA/revenues) for the last three years for a company, and two of the three years, EBITDA is negative. In that case, EBITDA margin would be nonsensical and not applicable, N/A?

 

[numi]

yes

 

[Billy Collins Jr]

slourenco Wrote:
——————————————————-
> I’m calculating EBITDA margins (EBITDA/revenues)
> for the last three years for a company, and two of
> the three years, EBITDA is negative. In that case,
> EBITDA margin would be nonsensical and not
> applicable, N/A?
If anything, it would be not meaningful (n/m) - as you would do for negative price/EV multiples. The data is available, it just doesn’t yield a meaningful result.
However, this would depend on why you are calculating EBITDA margins in the first place. If you are trying to show that the company has cut costs, then a progression from -10% in year 1 to +5% EBITDA margin in year 3 would be meaningful. On the other hand, if you are trying to determine an EBITDA margin to use for forecasting purposes, then you with such variance in historical data you might want to take a different path.

 

[Dreary]

negative profit margins are very common, and they do mean something…a company with -10% profit margin is better than one with -15% profit margins. What did you mean by not applicable, or even not meaningful?

 

[jimmylegs]

I would say it’s entirely applicaple. If you can’t even generate a positive EBITDA, you can’t even service your debt. Does the company have debt outstading? If so, the company’s obviously in trouble.

 

[bchad]

Well, if its a young company, then an increasing margin (even if that means less negative) is a sign that its growing and developing. It means “keep an eye on it.” If its a mature company, then negative ebitda is much more serious and potentially means the company is collapsing.

 

[jimmylegs]

bchadwick Wrote:
——————————————————-
> Well, if its a young company, then an increasing
> margin (even if that means less negative) is a
> sign that its growing and developing. It means
> “keep an eye on it.” If its a mature company,
> then negative ebitda is much more serious and
> potentially means the company is collapsing.
Agreed. I am a comemrcial lender and see this stuff all the time. I wouldn’t want to be any company right now, particularly a small one, with a negative EBITDA. Without borrowing additional money or raising equity, the only way you’ll be able to service your debt is through asset sales…. which doesn’t help grow your firm. Unless you’ve got a very valubale patent/idea or if you have contracts in the pipeline, banks right now don’t want to touch anything speculative, especially when that means capitalizing interest (ie paying debt with additional debt). Plus although it is not my area of competence, I would assume rasing equity under such conditions, particularly in today’s environment, would be very difficult.