Monday 16 November 2015

Why EBITDA can be hazardous to your health (Part Deux): Application to Valeant

In my previous blog I discussed EBITDA and how different it from operating cash flows.  Some of the comments that I got were that this is a made-up example. In all fairness, it is a somewhat synthetic example (though the idea was based on a real company, General Motors, circa late eighties).  So the question is what would happen had we looked at the company that starred in my first post, Valeant.

These are the numbers reported by Valeant:


Charting this over time yields the following graph:
As we can see, the two series are not the same.  Moreover, EBITDA is always larger than operating cash flows.  Finally, the two series become more and more divergent over time. 

The implication of this is that if we valued (foolishly) companies based on some EBITDA multiples (say, EV/EBITDA) then what we would get is a valuation that has nothing to do with discounted free cash flows or residual income valuations.

A possible criticism of this exercise is to say that one observations is not a representative statistical sample.  This is true of course.  So let's take a look at another company, Microsoft.


What this graph shows that for Microsoft the two series, like Valeant, are different and diverging over time.  The big difference is that in Microsoft operating cash flows are larger than EBITDA while for Valeant it is the other way around.

If you still do not accept my conclusion, based on the premise that also two companies is not a large enough sample,  I would challenge you to find a large sample of companies where EBITDA and operating cash flows are the same. I am willing to bet that this will not happen.

11 comments:

  1. This comment has been removed by a blog administrator.

    ReplyDelete
  2. This comment has been removed by a blog administrator.

    ReplyDelete
  3. I really impressed after read this because of some quality work and informative thoughts . I just wanna say thanks for the writer and wish you all the best for coming!.
    contabilidade bh

    ReplyDelete
  4. Thanks. I'm currently using EBIT/EV valuation as suggested by Joel Greenblatt in Magic Formula.

    Do you know if there's a formal way to calculate some metric based on CashFlow instead of EBIT?

    ReplyDelete
  5. Thanks for posting this info. I just want to let you know that I just check out your site and I find it very interesting and informative. I can't wait to read lots of your posts. Our services are created to help your dental company in attracting new patients. We also help bring back more of your existing patients. We know that every dental company is different. Therefore their treatments are created in a unique way to best represent the doctor. All of our services are world-class in performance and affordability. We market your services with professionalism and style. We pride ourselves on getting an ongoing connection with all our clients. We’ll always be by your side supporting and aiding you in growing the businesses of your dreams canaan avalon 1246

    ReplyDelete
  6. this website a great design and good info and good color,thanks and a have nice day Courtier immobilier

    ReplyDelete
  7. I really enjoy simply reading most of your weblogs. Simply wanted to inform you that you've people like me who appreciate your work. Definitely a fantastic publish. The information you have provided is actually very worthwhile Patio Chair

    ReplyDelete
  8. Everything has its own value, but this is really precious information shared by Author  social media management company

    ReplyDelete
  9. Very interesting blog. Alot of blogs I see these days don't really provide anything that I'm interested in, but I'm most definately interested in this one. Just thought that I would post and let you know freight shipping company

    ReplyDelete
  10. "Pretty! This has been an extremely wonderful post. Thanks for supplying this
    info." 토토사이트

    ReplyDelete
  11. This specific is generally clearly basic and in addition exceptional truth alongside without a doubt reasonable and besides in fact valuable My business is 검증사이트

    ReplyDelete