I'm currently working through Pignataro's text on LBO modeling and am making some notes along the way. Please feel free to delve in with me and render any comments, critiques, as well as offer further suggestions or give real examples from deals. In the book Pignataro walks you through the Heinz deal when the company was acquired by Berkshire and 3G Capital. Thus, any reference to models of figures will be from that unless otherwise noted.
In chapter 5 on how to model the Income Statement (IS) from this deal, Pignataro brings up the arguments for and against includingOther Incomein your calculation of EBITDA (Rev - COGS - Operating Expenses + Other Income).
Here's the argument as towhy Other Incomeshouldbe added:
- Although not core to revenue, other income is still in fact operating (being conducted) and should be represented as part of the company's operations.
- Include it if the other income is consistent and reoccurring.
- Example given: A car company's core business is selling cars, used or new. At the same time, however, they may further generate income by financing. The interest made from financing would be considered other income. It's consistent and reoccurring, but not part of core business.
Here's the argument as to why other incomeshould notbe included in EBITDA:
- If a company has other income but it's not core enough to the operations to be incorporated as part of the core profitability of the company.
- The company has other income but it's too seldom to label as reoccurring.
Why is this niche area important? It's a matter of increasing value.
Pignataro points out that if you're looking at acquiring an entire business which has other income which will continue to occur after theacquisition, then more than likely it should probably be included in EBITDA when valuing that company. At the same time, when conducting comps, if all companies don't have other income, then it should probably be left out.
Thus, if a company has other income which is consistent enough to justify it in EBITDA, this then could increase that company's prospects of a higher valuation over a company without it.
This write-up can also be found here: Instablog
FAQs
Other income is not a part of revenue because it is not related to main activities of a business. EBITDA: EBITDA stands for earnings before interest, tax, depreciation and amortization. EBITDA = Revenue – COGS – operating expenses and other income.
What should not be included in EBITDA? ›
It does not account for non-operating expenses such as interest on debt, taxes and other costs.
Does EBITDA include other operating income? ›
To calculate a company's EBITDA, we start with net income and add back several expenses, namely interest, taxes, depreciation, and amortization. The net income is calculated as total income minus total expenses. It includes both operating and non-operating income.
Does EBITDA margin include other income? ›
The margin does not include the impact of the company's capital structure, non-cash expenses, and income taxes. This ratio may be used in conjunction with other leverage and profitability ratios to evaluate a company. To learn more, launch CFI's online finance courses now!
What should I exclude from EBITDA? ›
EBITDA is a non-GAAP financial measure that deliberately excludes interest and income taxes, as well as adjusts for non-cash items, such as depreciation and amortization (D&A). Therefore, U.S. GAAP accounting standards prohibit the recognition of EBITDA on the income statement.
What income is included in EBITDA? ›
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a measure of core corporate profitability. EBITDA is calculated by adding interest, tax, depreciation, and amortization expenses to net income.
What is the 30 EBITDA rule? ›
The most common limit is set at 30 percent of EBITDA along with separate safe harbor and transfer pricing rules. For income years starting on or after July 1, 2023, debt deductions are limited to 30% of EBITDA. Deductions disallowed can be carried forward up to 15 years in some cases.
Why is EBITDA nonsense? ›
EBITDA is an oft-used measure of the value of a business. But critics of this value often point out that it is a dangerous and misleading number because it is often confused with cash flow. However, this number can actually help investors create an apples-to-apples comparison, without leaving a bitter aftertaste.
Should interest income be included in EBITDA? ›
EBITDA is a company's net income but excludes the impact of interest income or expense related to debt instruments, depreciation and amortization, and stated and federal income taxes.
Does operating income include other income? ›
Operating income includes expenses such as costs of goods sold and operating expenses. However, operating income does not include items such as other income, non-operating income, and non-operating expenses.
Dividend income is excluded from the EBITDA for the purpose of the Spanish interest limitation rule - Hogan Lovells Engage.
What is a good EBITDA? ›
A good EBITDA margin is relative because it depends on the company's industry, but generally an EBITDA margin of 10% or more is considered good. Naturally, a higher margin implies lower operating expenses relative to total revenue, while a low or below-average margin indicates problems with cash flow and profitability.
Is other income included in adjusted EBITDA? ›
Other times, one-time expenses need to be added back, such as legal fees, real estate expenses such as repairs or maintenance, or insurance claims. Non-recurring income and expenses such as one-time startup costs that usually reduce EBITDA should also be added back when computing the adjusted EBITDA.
Do you include other expenses in EBITDA? ›
EBITDA represents a company's core profitability by adding interest, tax, depreciation, and amortization expenses to net income. Meanwhile, operating income is a company's actual profits after subtracting its operational expenses or the costs of normal business operations.
Is 20% a good EBITDA? ›
An EBITDA margin of 10% or more is typically considered good, as S&P 500-listed companies generally have higher EBITDA margins between 11% and 14%. You can, of course, review EBITDA statements from your competitors if they're available — whether they provide a full EBITDA figure or an EBITDA margin percentage.
Should other income be included in revenue? ›
Other income is not taken as revenue. Firms calculate income from the company's core business activities, like selling goods and services. In contrast, they calculate other earnings from is from external sources which are not related to the firm's prime activities.
Should EBITDA include interest income? ›
EBITDA. EBIT is a company's operating profit without interest expense and taxes. EBITDA or earnings before interest, taxes, depreciation, and amortization uses EBIT without depreciation and amortization expenses when calculating profitability. EBITDA also excludes taxes and interest expenses on debt.
Is owner's salary included in EBITDA? ›
Typical EBITDA adjustments include: Owner salaries and employee bonuses. Family-owned businesses often pay owners and family members' higher salaries or bonuses than other company executives or compensate them for ownership using these perks.
