Earlier this week, I blogged about how relatively few companies are presenting adjusted EBITDA numbers that attempt to back-out expenses associated with COVID-19. That raises the question – how are companies getting the impact of the pandemic across to investors? This excerpt from a recent Lincoln International article says that companies appear to be adopting one of three alternative approaches:
– Annualizing Earnings. For some, business during Q4 2020 returned to more normal conditions than in April to June when COVID-19 was at its height. As such, for businesses disrupted by COVID-19 in the spring, annualized earnings either in the form of Last Quarter Annualized (LQA) or annualizing post June performance may be a more accurate measure of business performance than metrics from 2020.
– 2021 EBITDA. CFOs are more comfortable assessing 2021 EBITDA because they have better visibility into the full year’s budget, including contracted revenues and full implementation of cost-cutting measures, and as a result would prefer to focus on 2021 performance and underweight 2020 results.
– The Swap Out. Another twist to LTM EBITDA is to replace the months most impacted by COVID-19 with the earnings results of those same months from 2019. Swapping out those months with 2019 performance is an easy way to reflect actual levels that were once earned.
The article says that it is critical that the particular metric chosen is as defensible as possible – and that companies should evaluate KPIs to ensure the metric they select is one that market participants would actually rely upon.
-John Jenkins, TheCorporateCounsel.net March 19, 2021