HOW TO COMPARE COMPANIES BY USING EBITDA METRIC? CIPLA’S CONSISTENT REPORTING OF EBITDA AND MARGINS DEMONSTRATES ITS FINANCIAL STABILITY

 HOW TO COMPARE COMPANIES BY USING EBITDA METRIC?

CIPLA’S CONSISTENT REPORTING OF EBITDA AND MARGINS DEMONSTRATES ITS FINANCIAL STABILITY

WHAT IS EBITDA AND WHY IT’S POPULAR?

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization — designed to strip out non-operating costs to highlight core profitability.

WHY RESEARCHERS USE EBITDA?

·    Simplified view of operational performance

·    USEFUL for certain valuation multiples (e.g., EV/EBITDA)-- The EV/EBITDA ratio (EV-Enterprise Value) is a financial valuation metric used to compare a company's total value with its operating earnings.

·    Removes some accounting variability (depreciation methods)

COMPANIES WITH IDENTICLE EBITDA

Most investors treat EBITDA as a clean way to compare businesses. If two companies report similar EBITDA, we instinctively assume they have similar profit making power. That assumption is often wrong.

MAINTAINING POSITIVE EBITDA

When we look only at the EBITDA, how much must a company reinvest just to keep its EBITDA from falling?

Some businesses can sustain most of their earnings with limited reinvestment. Others must pour money back into plants, machinery, and assets every year just to stay in the same place.

WORD OF CAUTION

·    EBITDA is not a GAAP/IFRS defined metric, allowing companies discretion in what they include or exclude.

·    Calculations can vary widely across companies even in the same industry.

• Higher EBITDA margin usually suggests stronger operational efficiency.

• A lower EV/EBITDA ratio can indicate a potentially undervalued company versus peers.

• Always complement EBITDA with other metrics (e.g., net income, cash flow) because EBITDA excludes real costs like taxes and capital expenditures.

REAL CASE STUDIES

BHARTI INFRATEL — INCONSISTENT REPORTING

·    In academic research, EBITDA figures reported in annual reports did not match EBITDA recalculated from financial statements, and there was no clarity on adjustments.

·    Stakeholders cannot compare EBITDA across years or with peers when the base definition shifts.

·    Transparency in EBITDA adjustments is essential — without it, comparability is fundamentally compromised.

CIPLA LTD — DISCLOSURE MANAGEMENT

CIPLA’S REPORTED EBITDA TRENDS

 

·    CIPLA’s quarterly results over recent periods show consistent reporting of EBITDA and margins:

 

·    Q3 FY25: EBITDA of ₹1,989 crore with a margin of 28.1%.

 

·    Q2 FY26: EBITDA of ₹1,895 crore with a 25% margin.

 

·    Q1 FY26 guidance showed margins of 23.5–24.5%.

 

·    Q4 FY25: EBITDA margin expanded to 22.8%.

 

These figures demonstrate reporting that is directionally consistent with revenue and profitability trends across business segments.

MAHINDRA LOGISTICS — MARGIN DECLINE HIDDEN

·    In company news feeds, Mahindra Logistics reported a 17% decline in EBITDA and shrinking margins even while revenue increased — underscoring that EBITDA movements don’t always track underlying business risks.

·    A rising or flat EBITDA alone can still accompany weakening performance if costs, leverage, or working capital trends deteriorate.

EBITDA RESULTS IN STRUCTURAL COMPARABILITY

·    Capital-heavy industries (e.g., manufacturing, utilities) have large depreciation expenses, which EBITDA removes, artificially inflating profitability relative to asset-light sectors.

·    Cross-sector comparisons using EBITDA can therefore be fundamentally misleading.

Non-Recurring and Aggressive Adjustments

·    Regular “one-off” expenses that are excluded from EBITDA may actually be recurring costs, such as restructuring or legal costs.

·    Indian companies sometimes report adjusted EBITDA with ambiguous adjustments, making historical comparison problematic.

EXCLUSION OF INTEREST COSTS IN EBITDA

EBITDA’s exclusion of interest costs can make:

·    Highly leveraged companies appear healthier

·    Investors understate risk in capital structure

·    Example: Two telecom firms with similar EBITDA may have vastly different debt profiles — but EBITDA doesn’t reflect that nuance.

SECTOR VARIABILITY IN EBITDA MARGINS

·    Research shows wide dispersion in EBITDA-to-revenue ratios across sectors — telecom, utilities, software, and pharma — indicating intrinsic differences in operating models.

·    EBITDA margin benchmarks are not universally applicable across sectors.

PRACTICES TO IMPROVE EBITDA COMPARABILITY

·    Standardize definitions: Agree on clear items that are genuinely “operational” vs. non-recurring.

·    Disclose adjustments transparently: Provide reconciliations and rationales for exclusions.

·    Use supplemental metrics: NET CASH FLOW, PAT, Debt servicing ratios, or EV/EBITDA with adjusted normalized EBITDA.

·    Industry segmentation: Compare only within peer groups with similar capital intensity and business models.

CONCLUSION

Comparing companies using EBITDA is best done with structured metrics like EBITDA margin and EV/EBITDA, and in conjunction with other financial measures.

R V  SECKAR , FCS, LLB 79047 19295