Ebitda is arguably still the worst acronym in the ever-morphing lexicon of financial jargon.
As one observer remarked: “It sounds like the sound frogs make at night.”
Ebitda – or earnings before interest, tax, depreciation and amortisation – has increasingly become the key line in company income statements.
With a host of factors – thanks to new accounting regulations – able to influence what’s stated in the various forms of earnings Ebitda is increasingly being recognised as the “purest” measure of a company’s operational performance.
What we mean by “pure” is that Ebitda distils the best of the top line performance, taking into account the fixed and variable costs to running a business but leaving out factors not of an operational nature.
While some may argue interest (earned or paid), tax, depreciation and amortisation are absolutely part and parcel of a company’s operational life, no doubt that’s true.
But tax rates (for various technical reasons) can change, interest rates fluctuate, while amortisation and depreciation are fairly subjective matters.
Those factors can skew – or even obscure – a company’s real operational performance.
While the Ebitda table ranks by size rather than growth, there are some interesting conclusions that can be drawn from the rankings.
For the second year running banks have held on to the top rankings with resource stocks (top of the pile two years ago) hardly getting a look in the top 10.
In fact only Sasol (fourth last year), Anglo Platinum and BHP Billiton held on to positions seven, eight and nine.
The banks did a bit of a shuffle, with Standard Bank usurping Absa as “top dog”, and Nedbank edging ahead of FirstRand, which also slipped behind cellular services giant MTN.
SA’s other cell giant, Vodacom, clinched 10th spot, with Telkom – which unbundled Vodacom – coming 11th.
The big mover was industrial giant Remgro, which moved from 17th place to sixth place.
Remgro, now sans its sizeable tobacco interests (BAT), will probably not hold such a high position in next year’s rankings. Interestingly, BAT (British American Tobacco), the second largest company on the JSE by market cap, only ranked 28th in the Ebitda rankings.
Some surprises in the rankings would be the ranking’s suggestion that private hospitals group Netcare, plus industrial conglomerates Bidvest and Steinhoff, made more profits in 2009 than SABMiller, Old Mutual and Sanlam.
That certainly raises the odd eyebrow.
The more intriguing observations on the Ebitda rankings can be made in reference to the growth rankings – especially those over five years.
Top growth ranking over five years was lending specialist African Dawn (Afdawn), with a rate of 184%.
However, Afdawn has fallen from grace, with its recent financial results having to be radically restated.
With hindsight, Afdawn’s flattering ranking might perhaps serve as a warning there are risks in quickly growing a company’s earnings base.
Other companies that stood out with astounding growth rates in Ebitda over five years included gold miner Simmers (175%) and building supplies firm Buildmax (173%).
Without taking anything away from their respective performances, both companies have built Ebitda off a low base.
The same might be said for junior miners Petmin (109%) and Merafe (88%) – and again we aren’t being disparaging about their five-year achievements, because shareholders must be delighted.
Indeed, it’s the wider building sector and mining industry that seems to have come out tops in the five-year rankings for Ebitda.
Construction giants Murray & Roberts and Aveng achieved growth in Ebitda of 49% and 48% respectively over five years.
However, they were outdone by Wilson Bayly Holmes – Ovcon, which managed 56%.
Group Five (33%) and Basil Read (35%) were not too far behind.
Among the big commodity groups were some mixed performances over five years, ranging from Anglo American’s 6.7% to BHP Billiton’s 22.5%. Anglo Platinum fared well at 38% and Sasol notched up a solid 20%.
Most impressive among the larger mining groups was gold miner Harmony (64%), base metal miner Assore (69%) and copper miner Palabora Mining (91%).
Other standout performances over five years include media giant Naspers (33%), cell services group MTN (53%), shipping group Grindrod (63%), industrial conglomerate Steinhoff (40%), Richemont (30%) and private hospitals groups Netcare (34%) and Medi-Clinic (33%).
Banks, the biggest generators of Ebitda, fared satisfactorily over five years. Absa led the pack with 23%, followed by Standard (21%), Nedbank (17%) and FirstRand (16%).
Banking sector upstart Capitec Bank (53%) and, to a lesser extent, Abil (25%) looked far slicker.
Part of the fun of scouring the five-year table is to pick out companies that have been performing below their potential.
In that regard, check the five-year growth rankings for Barloworld, Imperial, Nampak, AECI, Afrox, Metair, AVI, Sun International and PPC.
Perhaps not a bad little “recovery portfolio”?
To view the Ebitda Table, click here