Understanding Business Earnings
Understanding that business profits can be represented in different ways is important when analysising a business for sale.
Some of the ways to represent earnings are;
Net profit after tax (“NPAT”),
Earnings before interest and tax (“EBIT”)
Earnings before interest, tax, depreciation and amortisation (“EBITDA”)
Proprietors earnings before interest and tax(“PEBIT”)
Proprietors earnings before interest and tax depreciation and amortisation (“PEBITDA”)
There is no right or wrong method, however generally certain industries are represented in the same way.
The application of NPAT, EBIT, EBITDA, PEBIT or PEBITDA must be supported by the use of a corresponding PE, EBIT, PEBIT ,EBITDA , PEBIT, PEBITDA multiple or capitalisation rate. There should be no affect on the resulting valuation or price of the business.