At the core of every business valuation, whether of an entire business or an interest in a business, lie three key elements that must be examined and understood. This is true regardless of the seeming complexity or simplicity of any valuation situation. The elements are expectations for cash flow, the expected growth in cash flow, and the risks associated with achieving the cash flow. In this short video post, we Keep It Simple, Sally or Stewart and will elaborate on the concepts in the near future.

The last post addressed EBITDA’s “Naughty 11” Problems and What to Do About Them. Today we talk about EBITDA’s “11 goodies” that help counter the “naughty 11” problems and make it a useful tool for analysts, operators, and owners. In the end, there is no single magic measure of cash flow that reveals all about business value. EBITDA, however, is one measure of cash flow that deserves attention in terms of valuation-related analysis, but in the context of solid reviews of historical income statements, balance sheets, and cash flow statements with insights about history and outlook from management.

EBITDA is at the same time the most discussed and most maligned measure of business cash flow. Simply put, EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. The problem with EBITDA is that too often analysts or market participants or writers want to think that there is a single measure of cash flow that will reveal all, bringing Utopia to valuation. This post notes 11 things that EBITDA is not or will not do—and compares other cash flow measures according to the same criteria. Utopia does not exist and there is no valuation elixir. Sadly, we actually have to analyze companies to value them or buy them or sell them.