6.1.2 Lecture_11_Appendix_EBITDA_Coverage_Ratio

6.1.2 Lecture_11_Appendix_EBITDA_Coverage_Ratio - Appendix...

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Unformatted text preview: Appendix on the EBITDA Appendix Coverage Ratio Coverage 1 EBITDA as Alternative to EBIT • EBITDA popular with bankers Shows firm’s ability to generate cash to repay loans Non­cash expenses added back Tax ignored as irrelevant for meantime • • DA = “before Depn & Amortization” Does $$ value of DA need to be reinvested? If YES, then DA not “cash” available to investors (Use EBIT and the TIE Ratio) If NO, then DA = “cash” available to investors (Use EBITDA and the EBITDA Coverage Ratio) 2 This ratio is based on the idea of the TIE ratio, but is customised to show a ratio relating overall operating cash­flows (before tax) to cash flows relating to debt Numerator shows all cash flows available to meet fixed financial charges EBITDA + Lease pmts EBITDACov. = Interest + Lease pmts + principal pmts Denominator shows all fixed financial charges 3 Too much debt, but projected to improve EBITDA Cov. = EBITDA + Lease PMTs ( in Cash ) Interest Expense + Lease PMTs ( in Cash ) + Principal Repayments 510.6 + 117.0 + 40 88 + 40 + 0 Assumes there were no principal Repayments = = 5.2 × n Note: 2008 and 2007 figures have been corrected 2009 EBITDA coverage 5.2x 2008 2007 Ind. 8.0x 4 -2.47x 2.6x Comments on EBITDA • • • In the previous slide, it is assumed that There are no capital repayments • Ie no principal is repaid. But how can this be? There is a $500,000 drop in Long­term debt between the end of 2008 and 2009 This is possible if D’Leon negotiated with creditors to convert this amount of debt into equity. 5 Comments on EBITDA (2) • Please note that long­term debt due to be retired in the current year is reported in the Balance Sheet as part of “Notes Payable.” This is left out of the EBITDA Coverage Ratio In Brigham and Houston over a series of editions. • They limit principal repayments to “sinking fund” payments. • But given the purpose of the ratio, this seems strange. its denominator. See next slide: • A more useful ratio would include “Change in Notes Payable” in 6 EBITDA Coverage Ratio incorporating EBITDA change in Notes Payable change EBITDA Coverage Ratio 2009 Numerator EBIT Depreciation Lease PMTS Denominator Interest PMTS Lease PMTS Change in Notes Payable Sinking Fund Payments EBITDA Cov. = 511 117 40 -691 117 40 209 19 40 2008 2007 88 40 120 0 1.82 176 40 -520 0 0.65 63 40 Not known 0 2.60 7 Final slide on EBITDA Coverage • See textbook, pp111­112. Note the mention of sinking funds, • which turns up at the bottom of D’Leon’s Income Statement. • A sinking fund is a required annual payment that retires a portion of an outstanding bond issue. The basic idea: • Let there be a 10­year bond with par value = $100, with 100,000 bonds issued at par value and a requirement that 5% of the bonds are bought back each year Initial total value of the debt = $10m This implies 5,000 bonds are retired each year, costing $500,000. • Sinking funds are principal repayments But not the only type of principal repayment. 8 ...
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