Forum Topics AVA - EBITDA margins
rh8178
one year ago

Hi - I’m not sure that’s what they mean - I read that as 35% of EBITDA. On that basis it’s 35% of the 35% if you know what I mean - ie on $100m revenue - $35m EBITDA - 35% of that as a dividend - c. $12m dividend would be my view,


Should say "if" of course, EBITDA margin is 35%. Obviously if it's 10% - dividend pool would be less c. $3.5m.



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Slideup
one year ago

thanks rh8178, makes perfect sense!

I wonder why they are basing payout ratio on EBITDA rather than profits.

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BoredSaint
one year ago

EBITDA is often a better measure of cash earnings as it excludes non cash items that may impact on the NPAT of a business.

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Slomo
one year ago

I actually think EBITDA should be assumed guilty (until proven innocent) of being a terrible proxy for cashflow (or profits).

Reason for this is that it excludes too many 'cash' items like Capex, Interest Expense and Tax.

Interest expense may be zero if there is no Debt.

Tax may be zero if there are no profits.

But you need to check they are zero before excluding them as the banks and the ATO have a more senior claim on cash than shareholders.

Then there's Capex - some of which may be discretionary / growth and some may be non-discretionary / maintenance. In reality it's hard to tell the difference - often management don't even know. In hindight what seemed like growth capex may turn out to be maintenance as it was required to keep up with competitors and therefore maintain margins.

I see the temptation of using EBITDA but it really should be called EBITDABS in honour of Charlie Munger's definition of EBITDA = bullshit earnings. Adding BS on the end should help remind us that it's not real earnings or cashflow.

If you want real earnings, you need to use NPAT. For NPAT to be useful, you will probably need to normalise is based on your understanding of the business and it's likely long term earnings power (eg. COVID was a one off - hopefully...)

You can use EBIT for operational earnings which takes out the capital structure and the tax jurisdiction, but then you need to add back in assumptions for these based on different structures and locations.

The good thing about using EBITDA is that is smooths out lumpy cashflows where these make the CF statement hard to use. But the drawbacks far outweigh the benefits as you are giving up too much accuracy in pursuit of a shortcut.

In my opinion you really need to take account of the cashflows mentioned above if you want to make high conviction decisions that you can allocate capital based on.


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Slideup
one year ago

I have just been looking closely at AVA and thinking about what they are going to do over the next few years. AVA have guided to increase revenue to $70-100M over the next 3 years, which is a 2-300% increase with only a corresponding 50-70% increase in operating costs to do it. Their commentary at the AGM seems like they think this is a very achievable target.

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The gross profit margin should be maintained around the 65-75%, but what I am struggling to identify is what their EBITDA margin is likely to be going forward, does anyone have a good number to estimate this at. In FY21 it was 36% (5% ex IMOD revenue), in FY22 it was 4%, but this was a messy year and I think this is artificially low and was tangled up with the divestment of their old buisness unit. The buisness is also a bit different now than it previously was, so I am not sure if these old numbers are much of a guide. Base operating costs seem to be around the 10M mark, but this does not include depreciation and amortisation expenses. I am guessing that the EBITDA margin will be somewhere around 15-30% but this is still a wide range.

The part that I am confused about is that they have announced their Dividend policy going forward to be "not less than 35% of Earnings Before Interest Taxation Depreciation and Amortisation (EBITDA) annually (commencing based upon FY2023 results)".

From this I am assuming that their EBITDA margin must be considerably higher than 35%, as otherwise they will be depleting their cash reserves to maintain the dividend. Does anyone have a good estimate of how much of their EBITDA drops through to become NPAT?

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