Q: Please review how “adjusted EBITDA%” based on Illinois Painting Supply "Business Profit" is calculated for year 2017 in the Credit Refresher on Accounting Profit and Business Profit.
A: Thank you for this question! It appears that the Illinois Painting Supply Adjusted EBITDA% in the Credit Refresher is incorrect. We will make the appropriate adjustments to the Credit Refresher to correct the information presented.
In short, Illinois Painting Supply 2017 “Adjusted EBITDA%” was 3.99% and 2018 “Adjusted EBITDA%” was 4.75%.
The computations for 2017 are as follows:
- 2017 EBITDA: Operating Profit + Depreciation Expense = $129,760 + $7,713 = $137,473
- 2017 EBITDA %: EBITDA / Sales = ($137,760 / $942,647) = 14.58%
- 2017 Adjusted EBITDA: EBITDA – (Distributions + Loans to Owners – Taxes) = $137,7473 – ($64,318 + $69,163 - $33,641) = $37,633
- 2017 Adjusted EBITDA%: Adjusted EBITDA / Sales = ($37,633 / $942,647) = 3.99%
The computations for 2018 are as follows:
- 2018 EBITDA = Operating Profit + Depreciation Expense = $227,531 + $19,259 = $246,790
- 2018 EBITDA % = EBITDA / Sales = ($246,790 / $1,601,000) = 15.41%
- 2018 Adjusted EBITDA: EBITDA – (Distributions + Loans to Owners – Taxes) = $246,790 – ($141,904 + $90,278 – $61,422) = $76,030
- 2018 Adjusted EBITDA%: Adjusted EBITDA / Sales = ($76,030 / $1,601,000) = 4.75%
Q: Is there a reason that you didn't adjust Net Income for one-time events on the Income Statement?
A: Our purpose in choosing not to adjust Net Income for one-time events was to bring out the importance of one-time events, whether income or expense, to the performance of the borrower. The company must be able to withstand the burden of one-time costs while also avoiding becoming reliant on one-time income sources. The reality of these events is that although they originate outside the operation of the core business, they are real and merit being part of our analysis.
Course overview: Critical Ratios and The First Necessary Condition for Business Success