Hi RG community,
out of my depth in economics here and was wondering if you're able to help. There's a report trying to assess the impact of Covid19 on key sectors of the Italian economy.
However, rather than predicting monetary losses they use “ratios like EBITDA margin and EBIT interest coverage to infer the magnitude of the external shock”.
Hence the question above. If they are not reliable proxies for sectoral losses, is there a way to use them to develop an estimate for a sector's losses?
Thank you all very much in advance!
Francesco Pomponi it is possible, but batter to focus on performance also.
Interesting project Francesco Pomponi
I am sure most nations will be looking to do exactly the same thing. EBIT and EBITDA are proxies for operating performance and cash flow respectively. The big question is from which perspective or point of view do you want to assess sectoral losses?
Is your focus public or private companies? Are the sectors you are referring to, the MSCI - GICS classifications or equivalents?
REINVENTING THE WHEEL. There is no need to reinvent the wheel. There are legitimate market analyst organization that monitor sectoral performance. It could be monitor by week month, year, etc.
LINK:
https://www.bloombergquint.com/markets/equities/sectoral-indices
Although it is on the income statement, the EBITDA standard is not part of the accounting principles generally accepted by the US Securities and Exchange Commission (SEC). However, this scale and with the presence of the EBIT scale indicates operational profits as a result of investing its assets in a way that companies can benefit from to indicate its good operational side before deduction of income tax.
Those financial ratios capture a small part of the impact on firms in the sector since they are measuring (to some extent) two different aspects: profitability and interest coverage. Low profitability firms and those with low interest coverage will be most vulnerable to the length and depth of the cycle. However, I would suggest to also measure firms' Leverage, Liquidity, and the degree of reduction in revenues and how fast they can get back to normal sales. As we have seen in the markets the valuations of firms with high leverage and low liquidity have been punished the most. As well as those industries with more reduction in sales, for example, travel related firms such as hotels, airlines and cruse lines.
Thank you all for your useful answers! :) I have understood these are not useful proxies for the information I'm interested in - thanks again!
No, these provide a margin or ratio of earnings over revenue for the first ratio and the second is how many times are interest covered by earnings. For some industries these ratios don't make sense like banking/finance. For other industries that are highly geared or with high borrowings, these ratios give analysts a rough order of magnitude to assess the companies. .