Finance assignment evaluating the reliance on EBITDAand finding its alternatives

Question

Task: Write a research proposal in the form of a finance assignment on the topic, ‘Over reliance of EBITDA as an important factor in company evaluation: Advantages and Limitations of the use EBITDA and better alternatives financial measures’.

Answer

General Guidelines for the finance assignment

1. Complete the ‘To be filled by the student section’ in the cover page.
2. All assignments must be submitted as an electronic document in MS word via the LMS (Use 12 Times New Roman script with 1.5 spacing between lines)
3. The results are declared only if the student has met the mandatory attendance requirement of 75% and/or minimum 50 % under extenuating circumstances approved and ratified by the academic committee and the examination board.
4. The finance assignmentshould not contain any contents with references cited from websites such as ukessays.com, styudymode.com, slideshare.net, scribd.com, Wikipedia but should contain references/citations from credible academic journal and articles.

RESEARCH PROPOSAL - EBS – GMU Program
Student Name:
Submitted to (Faculty):
Date:

Note:The finance assignmentResearch Proposal will be the foundation of the project research work being undertaken by the student. The Proposal will be written of maximum 1500 words; the distribution of word count for each section is given below against each section title. The research plan timelines and the references will not be included in the word count.

You will write your answers in this given sheet itself.
1. Finance assignmentProject (research topic) Title (Over reliance of EBITDA as an important factor in company evaluation: Advantages and Limitations of the use EBITDA and better alternatives financial measures.
Provide a concise and clear title of the research project work being undertaken by you.

2. Introduction (400 words)[30 marks]
(a) In this finance assignmentresearch proposal, the advantages and disadvantages of EBITDA shall be identified and analysed. This particular company valuation tool was first introduced during the 1980s. EBITDA stands for earnings before interest, tax, depreciation and amortization. The profitability can be analysed and evaluated through this particular method. This method considered in the finance assignmentserves as a shortcut to analysing the financial status of the organisation. The investors or lenders are prone to identify and evaluate the EBITDA to understand the positioning of the organisation and take on vital decisions based upon such. There are various advantages of using EBITDA as a tool for company valuation. Likewise, it can be proclaimed in the finance assignmentthat there are greater shortcomings and limitations of using EBITDA as a company valuation tool. The advantages and disadvantages shall be analysed in this particular study keeping into account various literary journals and procured information about the prescribed topic of discussion. This particular finance assignmentresearch would further evaluate whether there is an issue of over-reliance or not for evaluating the financial status of a company by identifying the EBITDA.

Aim:
The main aim of the finance assignmentresearch is to understand and evaluate whether using EBITDA as a company evaluation tool is over reliance or not. Inclusive to that the study would shed light on the advantages and limitations of using EBITDA as a company evaluation tool to keenly identify the financial status of the organisation.

Research objectives:
The main objectives of this particular finance assignmentare being mentioned as under:
To understand how EBITDA determines the valuation of the organization and that keenly relates to the profitability of the organization.
To evaluate the advantages of using EBITDA as a company valuation tool.
To understand the limitations of using EBITDA as it cannot be appropriately used in various industries.
To keenly understand and determine whether using EBITDA is an over reliance or not.

Research Questions of the finance assignment:
How does EBITDA determine the valuation of the organization
How is EBITDA lined with the profitability of the organization
What are the advantages of using EBITDA as a company valuation tool
What are the limitations of EBITDA that can be identified with respect to various industries How using EBITDA might be an over reliance on company valuation

3. Literature Review in the finance assignment(700 words)[40 marks]
Drawbacks of using EBITDA as a company valuation tool:
According to the finance assignmentresearch, it can be proclaimed that EBITDA cannot be implied to all industries. In the calculations of EBITDA, depreciation is not kept into account therefore the industries which are machined driven involve a lot of depreciation of machinery (Bouwenset al., 2019). In such cases keeping an account of EBITDA for calculating the financial status of the company might not be beneficial for the investors.

Apart from this, there are various limitations of EBITDA and thus, it lacks to show the appropriate information regarding the organisation. Various finance assignmentstudies have proclaimed that EBITDA might be misleading and the management might show higher profit through manipulation and speculative means which might further mislead the investors and anyone who is vested in the organisation (Kourtiset al., 2022). Inclusive to that, the businesses which are machine driven and are operated through factories in such cases, EBITDA shall not be kept into account while identifying the position of the company.

Moreover, the Cash Flow which can be obtained through the calculations of EBITDA might not be true to senses. Though EBITDA is proficient to show the profitability of the firm the cash flow information procured might not be true and sufficient, as various factors are not present in the calculations of EBITDA (Lin et al., 2021). Based upon such factors it can be proclaimed in the finance assignmentthat there are limitations and quite logical factors that EBITDA has great drawbacks and might not be over relied upon to be used as a company valuation tool.

Inclusive to these are further drawbacks of EBITDA mentioned in thefinance assignment. A firm or organisation might not procure a loan by producing the EBITDA statement, as it lacks the vital and most important factors therefore loan is only provided on the actual financial statements (Magliet al., 2018). Further, EBITDA shows a higher amount of profits and hides the high interests which are highly misleading with respect to the valuation of the firm or organisation. Inclusive to that the valuation of parents after expiring is still kept on account while calculation of EBITDA as depreciation is not kept into hold therefore a larger picture of the organization is likely to be missed by over-depending to estimate the financial status of an organisation through EBITDA.

Advantages of using EBITDA as a company valuation tool:
Apart from the drawbacks, EBITDA has various bright sides too. With the help of the EBITDA keeping an estimate of the cash flow through the operations in progress can be procured. Inclusive to that the value of the cash flow can be kept into account (Mauboussin, 2018). Moreover, though accurate information is not been recognisedin thefinance assignmentbut with the information through EBITDA future estimates and strategic planning and decision making can be headed for improved growth of the organization and procure higher profitability and gain.

The working progress of the organization can be determined through EBITDA. The functioning business model into action, the growth procured through the business model can be identified and proclaimed easily and strategically (Postula and Chmielewski, 2019). Based upon such factors it can be proclaimed in thefinance assignmentthat EBITDA helps to contribute largely to portraying the growth of business and operational activities along with the perceived business model into action. Along with that, the most important factor is during the acquisition or sale of a business, the debt is not transferred to the hands of the person acquiring or buying the business. Therefore the person or individual who is interested in buying a particular business would be highly vested in the customers, cash flow of the business, the current activities, and the growth of the business (Umarait and Lapinskait, 2022). Therefore on such a basis it can be proclaimed or implied in the finance assignmentthat it is highly recommended to present the buyer with the EBITDA at that time, as it covers all such interests and information the buyer needs to know or would like to know in order to buy the business or acquire it. After analysing both the finance assignmentstudies and evaluation of the factors of pros and cons of using EBITDA as a company valuation tool it can be implied that EBITDA can be used at some points but over dependence on it might mislead in taking decisions. The comparative study implies that based upon the industries EBITDA might be used.

4. Research Process (300 words)[20 marks]
This particular finance assignmentproposal would use a descriptive research design. Justification: This particular finance assignmentresearch would procure data systematically through various means by implementing certain activities in a particular situation, or it might incur data from the mass population by various means.

The research philosophy that the research proposal might use is positivism research philosophy.

Justification: The main reason behind using this particular finance assignmentresearch philosophy is that it would procure or incur data from various experiences and situations and further link the procured data to the research.

The finance assignmentresearch approach that shall be used is the deductive research approach.
Justification: The topic has both pros and cons prescribed topic, therefore, it can be proclaimed that the deductive research approach is prone to be implied in the research to appropriately pick hypotheses and analyse the data through the hypothesis.
Both the Qualitative and quantitative data sets shall be implied in this particular research paper. Both numeric and qualitative analyses shall be presented.

Secondary data collection techniques shall be used in this particular research. The researcher of the finance assignmenthad to go through various books, journals, and articles and review them keenly to link and incur valuable data from the existing data sets to collect and present informative data based upon the prescribed topic (Cave and von Stumm, 2021). Alongside, for this particular research experiences and past case studies would provide informative details therefore the researcher might review them.

Ethical Consideration adhered while writing the finance assignment:
All the data collection methods used and the data collected and presented along with the finance assignmentresearch shall be ethically done by the researcher. Inclusive to that the ethical norms and regulations were maintained while the accomplishment of the research.

5. Research plan and timelines of thesis submission (100 words)[10 marks]

Time plan:

Gantt chart:

6. References /Bibliography of planned reading

Bouwens, J., De Kok, T. and Verriest, A., 2019. The prevalence and validity of EBITDA as a performance measure. ComptabiliteControle Audit, 25(1), pp.55-105.
Cave, S.N. and von Stumm, S., 2021. Secondary data analysis of British population cohort studies: A practical guide for education researchers. British Journal of Educational Psychology, 91(2), pp.531-546. Kourtis, E., Kourtis, M., Curtis, P. and Hanias, M., 2022. Sustainable Business Growth, Value Creation and Dynamic Competitive Advantage: The Greek Pharmaceutical Industry. European Research Studies, 25(2), pp.46-79.

Lin, C.S., Chiu, C.M., Huang, Y.C., Lang, H.C. and Chen, M.S., 2021, December. Evaluating the Operational Efficiency and Quality of Tertiary Hospitals in Taiwan: The Application of the EBITDA Indicator to the DEA Method and TOBIT Regression. In Healthcare (Vol. 10, No. 1, p. 58). MDPI.
Magli, F., Nobolo, A. and Ogliari, M., 2018. The effects on financial leverage and performance: The IFRS 16. International Business Research, 11(8), pp.76-89.
Mauboussin, M.J., 2018. What Does an EV/EBITDA Multiple Mean. Bluemont Investment Research. Postula, M. and Chmielewski, W., 2019. The impact of intangible assets and R&D expenditure on the market capitalization and EBITDA of selected ICT sector enterprises in the European Union. International Journal of Economics and Finance, 11(8), pp.117-128.
Umarait, L. and Lapinskait, I., 2022. Analysis of the impact of sustainable development on company’s value. In 12th International scientific conference “Business and management 2022”, May 12–13, 2022, Vilnius, Lithuania (pp. 307-314). Vilnius Gediminas Technical University.