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EBITDA and normalizations... essential for valuation

deminor NXT > News > FINANCE – EBITDA and normalizations

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Introduction

A commonly used measure of financial performance and valuation is EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). However, this does not always provide a complete picture of actual business operations.

That is why adjusted EBITDA (also known as normalized EBITDA) is often used to gain a more realistic insight into actual business performance.

Normalized EBITDA

Normalized EBITDA takes into account one-off, non-operating, or unusual costs and revenues that affect the result. Eliminating these elements provides a clearer picture of core performance, making financial results more comparable over time and between companies.

 

Advantages

 

  • Clearer picture of operational performance
    • Shows how the company is performing structurally, without the noise of incidental events.
  • Better comparability
    • Makes it possible to compare a company’s performance with that of its competitors, regardless of unique or temporary circumstances.
  • More relevant for valuations or acquisitions
    • Provides a more realistic picture of profit capacity, leading to a more substantiated and market-based valuation of the company.

 

 

Examples of normalizations

As explained above, normalized EBITDA provides a more realistic picture of operating performance by excluding exceptional or one-off items. Typical normalizations include legal costs in disputes, severance payments for directors, proceeds from the sale of assets, subsidies, or restructuring costs.

 

Non-market-based salaries, rental income outside the core business, or temporary marketing campaigns are also often adjusted. Eliminating these elements produces a cleaner and more comparable result that is more relevant for valuation and acquisition purposes.

Limitations of EBITDA

It is important to note that although EBITDA is often used as a measure of performance and valuation, it has clear limitations:

 

  • Not a cash flow measure
    • EBITDA does not take into account changes in working capital or actual cash flows.
  • Ignores capital expenditures (CapEx)
    • Investments in fixed assets, crucial for future growth, are not taken into account.
  • No representation of debt burden
    • Interest and repayments are ignored, meaning that the actual financial pressure of debt is not visible.
  • No insight into liquidity
    • A company may have high EBITDA but still experience liquidity problems.
  • No account taken of depreciation and amortization
    • For capital-intensive companies, this can lead to an overly optimistic view of profit capacity.

 

 

How can deminor NXT help?

We understand how crucial it is to present the right financial information during an acquisition or merger. Our advisors support you in identifying relevant normalizations, so that you get a transparent and reliable picture of the company’s performance. In this way, we ensure that your company is presented to potential buyers in a correct and convincing manner, an essential step for a successful transaction.

 

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Please feel free to contact us for more information or an exploratory meeting.

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