We're all familiar with EBITDA, an indicator used by financial executives to present their results before interest and expenses. Now it's EBITDAC, with a "C" for "coronavirus". This new indicator, the result of the health crisis, enables companies to present the results they would have achieved in the absence of the crisis and the containment measures.
A financial indicator that embellishes results
The process is not new: before the Covid-19 crisis, finance departments were already accustomed to presenting their results using EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization"), a financial indicator measuring profits before interest, taxes, depreciation and amortization.
Companies now use EBITDAC, "Earnings Before Interest, Taxes, Depreciation and Amortization and Coronavirus", to present Covid's non-crisis profits and take into account the results that would have been achieved without the containment measures imposed by the States.
Major financial challenges
EBITDA, and hence now EBITDAC, is very useful to financial managers in convincing investors and shareholders of a company's good health and ability to create wealth. In particular, it enables investors to better estimate the acquisition price of a company during a merger-acquisition operation.
This indicator is also taken into account by banks when granting financing to companies. Early repayment clauses, or "bank covenants", are included in the loan contract, requiring the company to respect certain ratios, including EBITDA.
A widely used indicator
Several companies have already turned their EBITDA into EBITDAC. This is the case, for example, of US company CES Energy Solutions Corp, which has reported EBITDAC of over $51 million in addition to its first-quarter 2020 revenues of almost $350 million, representing the profits that would have been recorded in the absence of the health crisis and containment measures.
The same applies to the German industrial group Schenck Process, which added EBITDAC of 5.4 million euros to its results for the first quarter of 2020. While the Group's earnings should have been down by 16%, the use of EBITDAC enabled it to report an increase of 20%.
Spanish pharmaceutical company Rovi, meanwhile, reported EBITDAC of €21 million for the first quarter of 2020, presenting a 77% increase on the first quarter of 2019.
The mistrust of financial analysts and regulators
However, both financial analysts and regulators are questioning the relevance of this new financial indicator. Unlike EBITDA, which is based on tangible, measurable external factors (such as interest and taxes), EBITDAC is based on losses that are difficult to measure and can never be recovered.
This new financial indicator would therefore be of limited use, especially since, as Mathilde Fox, head of the finance training and research unit at ICHEC Brussels Management School, told RTBF in a May interview: "It's tempting to show embellished figures to lenders, banks and financial markets. But analysts are still going to look at the liquidity situation, the cash a company has at its disposal - and above all the cash forecasts."