What is an EBITDA Bridge?
An EBITDA Bridge can be a very useful tool for an investor. There are many different aspects that influence the profit or loss of a company,and this can all be listed in a long, complex set of information known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
However, EBITDA can be very overwhelming, and it can sometimes be difficult to pick key pieces of information out of it.
And EBITDA Bridge does just that. It picks out key pieces of information in the EBITDA and illustrates them in such a way that conclusions can be made as to what is directly influencing the profitability of a company, and why.
Using this information, inferences can be made as to how the company is doing in general, and how it may do in the future.
The use of EBITDA Bridges is quite popular amongst high level executives when creating internal reports as an EBITDA Bridge not only indicates that there is a change in profitability, but also shows why. However, the use of EBITDA Bridges is not limited to executives, and the average trader can also make use of them for various reasons.
How to Create an EBITDA Bridge?
In order to create an EBITDA Bridge, you will first need a completed EBITDA. This may be released by the company itself. However, it is important to consider, when using reports that are released by the companies at set intervals, that the EBITDA does not take into account interest, taxes, depreciation, and amortization.
In many cases, reports that are released by the companies do, in fact, take all of these things into account, so you may have to manually add these values back in.
Next, pick out all the costs as well as all the relevant increases in profit, margin etc. This should give you a relatively simple figure, such as the one illustrated below, which will indicate what the cause of the additional profit or loss is.
EBITDA Bridge Illustration
In this example, only three different aspects have been analyzed for the sake of simplicity. The increased revenue, the increased cost, and the increased operational expenses.
In many cases, there will be more factors than these that will influence the final EBITDA Bridge, however, these appear in almost all of them. In this case, both cost and operational expenses increased, leading to a decrease in total profit, however, the increased revenue compensated, still leading to an overall profit in 2021 of 125% that of 2020, or a 25% increase.
In some cases, the values may be added as well, but when it comes to comparing companies of different sizes, it is recommended that percentage is used instead, to clarify the relativity of the figures.
Although not all EBITDA Bridges look like the one illustrated above, and can take on a variety of different formats, it is important that you keep whatever illustration you choose consistent, to prevent any confusion amongst investors as well as misinterpretation of the illustrated data.
Uses of an EBITDA Bridge
Comparing Companies
Due to the simple nature of an EBITDA Bridge, it is easy to compare two or more companies to one another without having to spend days or weeks pouring over every number in their reports. This means that it becomes easy for an investor to decide which company is better for them without too much trouble.
Comparing Multiple Periods
It is sometimes difficult to see how a company continues growing, especially when they get much larger, but an EBITDA Bridge allows a person to easily compare multiple periods of the same company. However, this only remains simple if the EBITDA Bridge format is kept consistent, otherwise some other difficulties or misinterpretations could arise.
The EBITDA Bridge graphic above is one that would be ideal for comparing multiple periods of the same company as the graphic shows changes in the operational expenses, revenue and cost of goods, illustrating the net value at the end as well.
Income Statement and Balance Sheet of GAMING REALMS Company
Pros and Cons of Using EBITDA Bridges
Pros
An EBITDA Bridge is overwhelmingly simple. Anyone with a basic understanding of arithmetic should be able to understand what is being illustrated in an EBITDA Bridge. This means that it is the ideal tool for new traders, who may be a little bit confused or overwhelmed when first delving into the multi-page income reports of large companies.
Cons
Although the removal of interest, taxes, depreciation and amortization greatly simplifies the EBITA Bridge, this information is also vital when considering which company is the best for you to invest in.
It may also require additional time on your part as the EBITDA Bridge is not always made available by companies. You would have to work out the values that you need to add back in as well.
This will be both time consuming, and may open up room for error if you are using something like Excel, instead of having the process automated.
Should You Use an EBITDA Bridge?
When considering investing, an EBITDA Bridge can simplify information a great deal. This means that it is an ideal way for many traders to understand how a company is doing, whether it is in relation to the past performance of the same company - indicating growth, or whether it is in relation to another company - perhaps illustrating which would be the better investment depending on your trading style.
Of course, an EBITDA Bridge should never be used in isolation. Instead, it is more effective when you pair the simple explanation of the company's performance with in depth research and technical analysis. However, if used correctly, an EBITDA Bridge can be a useful tool for most traders and investors.
Remember, all trading comes with risk, and although historic performance which can be analyzed through a tool like the EBITDA Bridge is often a good indication of how a company may do in the future, it is never a guarantee. All forms of trading and investing come with risk. Remember to take this risk into account at all times, and to trade responsibly.
After learning about EBITDA Bridge, you might be also interested in What is a 10-Column Worksheet in Accounting? and What are Seller notes?
