Reading 28: Relative-Value Metho....olio Management－LOS d

The method that provides the most stable estimates of net profits is to estimate the operating profit margin, which is defined as earnings before depreciation, amortization, interest, and taxes (EBITDA). We then subtract out the estimates of depreciation, amortization, interest, and taxes.

EBITDA (Earnings before depreciation, amortization, interest, and taxes) or the operating profit margin would be calculated as a percent of sales. Depreciation and amortization should not be calculated as a percent of sales because they are more closely tied to the level of capital expenditures. Interest expense also should not be calculated as a percent of sales because it is dependent on the level of debt and interest rates.
  

Higher inflation, higher unit labor costs, and lower capacity utilization have all been verified empirically to result in lower EBITDA margins. Although higher import levels should result in greater competition for domestic producers and lower profit margins, this relationship was not found in empirical testing.