30.14. Info: Pay attention to the NFP / EBITDA ratio

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Watch out for the PFN/EBITDA ratio

The PFN/EBITDA ratio should express in how many years the company would be able to repay its financial debts if it used all of its “potential” operating flows (expressed by EBITDA) for this purpose. The index is widely used by the financial community, professionals and banks as an indicator capable of revealing the attractiveness of a company. A careful reading of the parameters that compose it and the analysis of real cases instead invites greater caution. Below are definitions and analysis of the PFN/EBITDA ratio of a sample of companies. It will be up to the reader to formulate his own idea regarding the correct use of the indicator.

The PFN/EBITDA Ratio

Definitions

• PFN = Net Financial Position, or algebraic sum of Financial Debts net of Liquidity.
• EBITDA = Earnings Before Interest, Taxes, Depreciation and Ammortization. Corresponds to MOL (Gross Operating Margin). Indicates the operating margin deriving from the Characteristic Management of a company, i.e.: Revenues net of Consumption, Fixed and Variable Costs, General and Administrative Costs (see attached document)
• The higher the ratio, the lower the firm's ability to repay the debt owed to the system should be.
• The lower the ratio, the greater should be the ability of companies to produce wealth and therefore sufficient financial resources to honor their commitments.

The ratio is also used to quickly calculate how soon the firm will be able to repay the debt. A ratio of 5 means that, all things being equal, it will take at least 5 years to fully repay your debt (excluding financial charges). A rough assessment but often used as a dividing line between good companies and less interesting ones, at least for those who are looking for healthy companies. The careful reading of these definitions imposes some questions that are unlikely to find a univocal answer, suitable for all business realities; some examples:

• What are the financial debts? Do they include payables to shareholders? And the debts to other lenders? Payables to subsidiaries?
• Which items should be included in the Revenues? The A5 entry? The increases in fixed assets for internal work?
  

Leanus processes the analysis of PFN and EBITDA both on historical data and on Business Plan data so that the user can evaluate which is the best reclassification model to adopt to best analyze the individual company reality.