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The EBITDA Conundrum

By February 15, 2018 No Comments

COLLABORATIVE FOR CUBES™ RESEARCH OFFERS WAY OUT.

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a powerful metric used to evaluate the profitability of a business. Because of its nuanced approach to earnings, it is a different metric from cash flow.

At the 100,000-foot level, many boards and CEOs of business-to- business (B2B) companies rely on EBITDA as the key to evaluat- ing the current and near-term health of their companies. Efforts to manage EBITDA typically focus on production factors that fall within the realm of finance and operations. Indeed, managing a firm’s operational expenditures is seen as key to managing EBITDA.

While managing EBITDA via operating expenses can be effective, the focus of such an approach is strictly inward-looking. Over time, the focus becomes cost cutting, efficiency, and lean production. Research shows companies focusing on efficiency succeed at delivering higher long-term value to shareholders, but surprisingly, a 2005 study showed companies that combine an efficiency focus with a customer focus deliver even higher long-term value to shareholders — up to 1.5 times higher.

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