Question

compared to the Net Income, why is EBITDA such an important number for most analysts? is there any revenue expense item that seems to be increasing or decreasing faster than it should? what few numbers would you focus on and what can you ascertain from those numbers?

INCOME STATEMENT DATA 2007 2008 2009 2010 2011 2012 Revenues 13,300 9,412 10,383 9,775 10,707 11,700 <Cost of goods sold and occupancy expense -3,999 -4,645 4,916 -4,325 -4,459 -5,813 Gross Profit 5,412 5,738 5,450 6,249 6,785 7,486 <Store Operating Expenses> Other Operating Expenses> <Depreciation and Amortization> <General and Administrative Expenses> <Restructuring Charges> Other operating income (1) Income from Equity Investees Non-recurring operating gains <losses> Operating Profit Interest income <Interest expense Income <Loss> from equity affiliates Other income or gains <Other expenses or losses -3,425 -3,216 3,745 -3,551 -3,595 -3,918 -330 -264 -293 -393 -430 -294 467 -510 -549 -535 -523 -550 489 456 453 -570 -749 -801 0 -267 332 -53 0 0 114 108 122 148 174 211 30 1,728 1,054 504 562 1,419 1,997 41 9 37 50 116 94 38 -53 39 -33 -33 33 Income before Tax 1,056 460 560 1,437 1,811 2,059 <Income tax expense> Income <Loss> from discontinued operations -384 -144 168 489 -563 -674 Extraordinary gains <losses> Changes in accounting principles 1,248 Net Income 673 316 392 948 1,385 Net income attributable to noncontrolling interests 0 1 -3 -2 -1 Net Income attributable to common shareholders 673 316 391 946 1,246 1,384 Net Income (enter reported amount as a check) 391 946 673 316 1,246 1,384 Other comprehensive income items Comprehensive Income 17 -6 17 -8 -11 -24 690 309 409 940 1,237 1,361

Answer 1

EBITDA provides more enhanced picture of the operating income of company. As we exclude the depreciation charges out in EBITDA it only incorporates for the operating expenses and COGS. If we include depreciation we are considering it as an operating expenditure. This is fine for the firms which have a significant capital invested in fixed assets either tangible or intangible but for the financial firms or more of IT or software based industries don't incur significant depreciation charges as the depreciation on buildings and computer systems is not that high. So for them EBITDA would be a better estimate. Thus we can say overall analysts prefer EBITDA as depreciation might be somewhat subjective for analysis and as a general convention to follow they prefer EBITDA over EBIT.

I think COGS is changing faster than expected as along with sales improvement in 2008 it has not reflected in the bottom line and this year as net income has decreased. While if we observe further COGS increment or deecrement is higher as compared to rise or fall in revenue. As in for 2011 and 2012 increase in COGS relative to increase in revenue is somewhat lower and this might be due to change in inventory measurement techniques or may be some write down in the inventory value thus affecting COGS in turn. Also increase in operating expenses in 2008 is higher rather than 2011 with respect to revenue. Depreciation seems to be inline with revenues as increment or decrement in that has affected.

I would focus particularly on the change in expenses over years. As here depreciation is also significant so we consider EBIT as our operating profit measure here. Again change in EBIT and EBIT margin is important for analysing the profitability of firm. Also Net profit margin and proportion of non-operating income in net income also matters a lot. Its important to observe that if firm is reporting earnings based on its operational activities or not because non-operating income is not sustainable source.Better way to analyse all these numbers is to form a common size income statement i.e all entries as a percentage of revenue and observe the numbers, their trends and also growth in those entries with respect to growth in revenues.

So generally we look for COGS, major operating expenses, depreciation (particularly here) and interest expenses. These four are important. Here we can say interest expense is not high thus firm is not highly levered and is sustaining its own growth. Also no dividend payments show that may be equity is not very high or they are focusing on expansions using equity. Thus we can analyse most of these accounts.