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Corporate EBITDA’s at 2 decade lows, it seems!

Posted by fairval on October 13, 2013

A recent broker report throws up an interesting insight – the so called increase in ROE’s of Indian companies over the last decade was powered by easy money,  not by EBITDA improvement.

Image

The 3 lines above may confuse: they are different sample sizes. The black line, which is the oldest data, is ~650 companies. The blue line, is 10 year data and around 1100 companies, grey line has even more companies

If we just focus on the black line, EBITDA margins are the least since 1994! (tho ROE is still higher)

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One Response to “Corporate EBITDA’s at 2 decade lows, it seems!”

  1. Varadha R said

    Law of diminishing returns – nothing to get surprised here. The profit margins from the first 100 million customers will always be lower than the profit margin from the next billion – note I said profit margin, not profits. You could make that up by :

    – asset turnover/inventory turnover – sell more low margin products faster
    – changes in business model – outsource manufacturing (ala FMCG companies), outsource overheads (think GE and IT services)

    Ultimately, as a shareholder, what matters is RoE – I did a similar analysis two years ago and what stood out was not so much the “averages” but the variation in the extremes ie., the number of companies with low RoE that do not even get back their cost of capital is much larger than what it was in 1994 circa.

    What it proves is that a lot of this easy money found its way into businesses that are undeserving of liquidity – think infrastructure companies , think retail, think unprofitable companies in internet etc.

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