Josh Aharonoff
Jun 15, 2023
Hey there, fellow finance enthusiasts!
This week, we dive into the captivating world of EBITDA - the 6 sexiest letters in Finance & Accounting. Discover its definition, calculation, importance, and common misconceptions.
Additionally, we'll explore a comprehensive collection of 14 essential financial ratios and metrics, along with a handy Controller Checklist.
Get ready to enhance your financial acumen and empower your decision-making skills.
What we’ll be covering in this edition:
The Definitive Guide to EBITDA
14 Financial Ratios & Metrics (with definitions & formulas)
The Controller Checklist️
Let's dive in...
EBITDA just may be the 6 sexiest letters in Finance & Accounting
There is so much emphasis on this metric, yet it is so often misunderstood
Let's start with:
➡ What is EBITDA?
EBITDA's literal definition is
Earnings
Before
Interest
Taxes
Depreciation
Amortization
➡ How is EBITDA calculated?
Like the name implies..
Take your net income
[+] Interest Expenses
[-] Interest Income
[+] Taxes
[+] Depreciation & Amortization
➡ Why is EBITDA so important?
Well.. a number of reasons...the 4 biggest being:
1️⃣ EBITDA is commonly used to value businesses
2️⃣ EBITDA is commonly referenced on a number of ratios
3️⃣ EBITDA can be a good approximation for free cash flows (though it can also wildly differ)
4️⃣ EBITDA can be a good measure to compare companies across the same industry
➡️ What are some common misconceptions with EBITDA?
1️⃣ EBITDA is not a GAAP metric
That’s right…for that reason, you won’t find it on a profit and loss
2️⃣ EBITDA does not equate to cash flows
Your cash flows can wildly differ from period to another when compared to EBITDA, depending on how things like accounts receivable / payable, and fixed assets come into the mix (to name a few)
3️⃣ EBITDA is not the same as net operating income
While in many cases these 2 items may be the same, for some companies, it can differ
An example can be if a Fixed Asset is necessary in order to carry our revenue, in which case Depreciation would be included in cost of goods sold
➡️ What’s my take on EBITDA?
It’s a powerful metric, and it’s popular for a reason
At the same time, it’s just one metric filled with hundreds that can be used to understand what’s happening with a business, and should not be the only one that you measure
Other metrics to consider are:
1️⃣ Gross Profit - what’s left over after you subtract out your COGS from your Revenue
2️⃣ Free Cash Flows - The cash flows available for distribution to investors or for future investments (operating cash flows - capital expenditures)
3️⃣ Annual Recurring Revenue - the amount of revenue that comes from customers committed to annual contracts that auto renew
And many more
Those are just a few things to note about EBITDA - there is so much more to it
Click the guide below to read more
1️⃣ Debt-to-Equity
Definition: A company's total debt to its total shareholder equity
Formula: Total debt / Total equity
2️⃣ Gross Margin
Definition: A company's Gross Profit displayed as a % of its Revenue
Formula: Gross Profit / Revenue
3️⃣ Operating Margin
Definition: The percentage of a company's revenue that is left over after deducting its operating expenses
Formula: Net Operating income / Revenue
4️⃣ Return on Equity (ROE)
Definition: How much of a return you are getting on your equity
Formula: Net Income / Owners Equity
5️⃣ Return on Assets (ROA)
Definition: Showcases a company's profitability by comparing its net income to its total assets
Formula: Net Income / Total Assets
6️⃣ Inventory Turnover
Definition: How efficiently a company uses its inventory by measuring the number of times inventory is sold and then replaced within a given time period
Formula: cost of goods sold / average inventory
7️⃣ Accounts Receivable Turnover
Definition: A company's efficiency in collecting its credit sales
Formula: Net Credit Sales / Average Accounts Receivable
8️⃣ Days Sales Outstanding (DSO)
Definition: How long it takes a company to collect payments from its customers
Formula: (Accounts Receivable / Total Credit Sales) x Number of Days
9️⃣ EBITDA
Definition: Short for Earnings Before Interest, Taxes, Depreciation, and Amortization, and is used in accounting to measure a company's profitability, and approximation for free cash flows
Formula: Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization
🔟 EBIT
Definition: Short for Earnings Before Interest and Taxes, and one of many metrics is used in to measure a company's profitability
Formula: Net Income + Interest Expense - Interest Income + Taxes
1️⃣1️⃣ Interest Coverage
Definition: A company's ability to pay the interest on its debt
Formula: Earnings Before Interest and Taxes (EBIT) / Interest Expense
1️⃣2️⃣ Asset Turnover
Definition: A company's efficiency in using its assets to generate revenue
Formula: Net Sales / Total Assets
1️⃣3️⃣ Days Payable Outstanding (DPO)
Definition: The average number of days that a company takes to pay its accounts payable
Formula: (Accounts Payable / Cost of Goods Sold) x Number of Days in Accounting Period
1️⃣4️⃣ Return on Ad Spend (ROAS)
Definition: Used in digital marketing to measure the effectiveness of advertising campaigns
Formula: Revenue from Advertising / Cost of Advertising
Did I miss any?
A Controller is responsible for ALOT of things
While the responsibilities may vary across the organization and demographic…
the responsibilities typically include managing the following:
Bookkeeping & Month End Close → here you prepare the information that will make up your financial reporting
✅ Import GL Accounts ✅ Classify transactions ✅ Complete Bank Reconciliations ✅ Calculate Adjustments in Workpapers ✅ Book adjusting journal entries ✅ Finalize review for accuracy
Accounts Payable (procurement)→ here you collect bills, approvals, and coordinate payments with vendors
✅ Collect purchase order ✅ Match purchase order to bill from vendor ✅ Request W9 ✅ Upload bill to accounting software ✅ Classify bill & assign for approval ✅ Collect approval ✅ Process payment
Invoicing → here you send invoices to customers, coordinate on outstanding balances, and collect payment ✅ Collect customer contract & signature ✅ Collect approval on invoices to be sent ✅ Send invoice to customer ✅ Coordinate payment details with customer ✅ Send follow up for collection ✅ Record payment
Payroll → here you onboard new employees, process paychecks, and coordinate with employees, payroll platforms, and the government ✅ Collect employee details ✅ Onboard employee to payroll system ✅ Prepare payroll entries ✅ Assign payroll for review ✅ Process payroll upon review ✅ Coordinate paycheck issues with employee, payroll system, and tax agencies
Audit & Tax → here it’s common to coordinate with outside parties on any audits and/or tax filings, though it’s also possible to have an in house department dedicated to this ✅ Provide information from info request ✅ Prepare financial statements and relates disclosures ✅ Prepare tax filings / assist tax preparer ✅ Review tax calendar for relevant filings
FP&A → although controllers typically manage the accounting function, it’s common to work hand in hand with FP&A to ensure a smooth overall Finance & Accounting function ✅ Coordinate month end timing with FP&A ✅ Provide financial statements for import into financial model ✅ Review budget vs actuals & provide commentary ✅ Provide inputs for forecast
That’s my checklist for a controller…there’s much more to it
I hope you enjoyed this week's edition of Legit Numbers!
If you haven't already replied to say hello, please do and let me know how I can help - I reply to all of my emails personally :)
Till next time!