Should I use EBITDA 5 Year CAGR in valuing a company like P&G?

Answer -

EBITDA stands for Earnings Before Interest Tax Depreciation Amortization.

This is a metric used for measuring operational performance. All the non-operational factors are excluded from the calculation.

A positive EBITDA and continuous growth indicates a stable business model and very well accepted in the market. Sales less all operational cost leading to surplus EBITDA every year with continuous growth in surplus addition is a clear sign of viability.

Hence EBITDA with a 5-year CAGR can be used in the valuation of a company. But this can be one of the factors to be considered for valuation. A Company's valuation is not just dependent on EBITDA. There are non-operational factors as well which can have an impact on the performance of the company otherwise. Interest cost on borrowed capital, depreciation on heavily invested equipment and assets, amortization of intangibles are other factors that can have a key impact on the net results of a company for a particular period.

Hence EBITDA 5 Year CAGR is good for estimating the value of a company but it is not reliable individually. Hence it should be clubbed with other metrics for valuation.