After looking at tips to improve the net income to sales ratio, an overview of how to improve the EBITDA to Assets ratio is included in this post. The EBITDA to Assets ratio is one of the five financial variables, used by the Business Credit Report by Sageworks, that were identified as both the best predictors of default and representative of a company’s financial characteristics.
By Mary Ellen Biery, Research Specialist, Sageworks
EBITDA, or earnings before interest, taxes, depreciation and amortization, is often used to measure a firm’s ability to generate income. It is widely used as a proxy for pre-interest, pre-tax cash flow from operations. Comparing EBITDA to a company’s assets helps show profitability — how much income, or cash, a company can generate from its equipment, property and other assets, according to Lawrence Litowitz, a partner at strategic advisory firm The SCA Group LLC.
One way to improve this ratio is to focus on the numerator – to increase your EBITDA. Boosting EBITDA typically involves either raising revenues (without a commensurate increase in expenses) or cutting expenses.
Raising revenues can involve better planning, such as getting ready early for holiday sales, or it can involve improving business offerings by gaining insight from customers through market research or other methods of customer input. “Reducing friction points — learning curves, waiting periods, paperwork, delivery charges, and so on — in the customer experience will encourage them to use and recommend your business more often,” according to Sageworks analyst Libby Bierman. However it’s done, increasing sales volume allows for better coverage of fixed costs, which can lead to higher profitability.
Cutting expenses is often the focus of efforts to boost EBITDA, because those savings may fall straight to the bottom line. One way to cut expenses involves seeking out multiple qualified vendors to get the best prices through competition while maintaining quality. “If the business is not continually reviewing and updating its existing and potential vendor lists, it may overspend on supplies or inventory,” said Michael McNeilly, director of advisory services at Sageworks.
The Better Business Bureau offers several suggestions for businesses to cut back on spending, which the agency notes has the added benefit of freeing up more cash. Ideas include increasing your insurance deductible (although it might be wise to add some of the premium savings to an emergency fund) and reviewing service plans for basic business services such as telephones, Internet and equipment leasing.
Sometimes it helps to benchmark the financial performance of the company to that of peers to guide efforts to improve EBITDA to Assets. Doing so can help identify areas where a business lags – in net profit margin, for example, or inventory turnover.
To learn more about how to improve on the other metrics that Sageworks identified as representative of a company’s financial characteristics and the best predictors of default, download the whitepaper: “Getting Business Credit: Improving the Financial Metrics that Matter.”