Decoding Crowd Finance

By Lauren Leibowitz, CrowdFundBeat Guest Contributor, Principal at 1st BridgeHouse Securities, LLC,

Part 1: When Reviewing An Investment Opportunity

 

Entering the crowd finance world is very overwhelming with lots of numbers, unfamiliar words and acronyms being tossed around in documents and conversations. So let me lend a helping hand and get you started on sounds like a professional.

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  1. EBITDA: EARNINGS BEFORE INTEREST, TAXES, DEPRECATION AND AMORTIZATION.

EBITDA definition: An accounting technique valuable for business owners as an important standard measure of profitability.

What makes EBITDA valuable is that unlike standard net income calculations that use a simple formula of revenue minus expenses, EBITDA factors in other expenses, like taxes and interest. EBITDA allows analysts to generate useful comparisons between companies, and to project long-term profitability and the ability to pay off future financing. EBITDA assists investors in comparing probability between companies and industries, since it eliminates the effects of financing and accounting. Because EBITDA is not a part of generally accepted accounting principles (GAAP), it may not automatically be included in a company’s financial statement. With an EBITDA value, the business and its investors are now able to better compare profits against those of the business’s competitors.

EBITDA calculation

To calculate EBITDA, a business must know its income, expenses, interest, taxes, deprecation (the loss in value of operational assets, such as equipment) and amortization, which is expenses for intangible assets, such as patents, that are spread out over a number of years. With those numbers in hand, the formula is:

EBITDA = Net Income +interest, taxes, depreciation and amortization.

Related formulas: EBITDAR & EBITARM

EBITDAR, stands for earnings before interest, taxes, depreciation, amortization, and rent or restructuring costs. It is useful for companies undergoing restructuring.

EBITDARM, adds rent and management fees to the EBITDA calculation. Credit rating agencies often use this to make comparisons of companies that carry a high debt load.

  1. ROI: RETURN ON INVESTMENT

The most common profitability ratio. Decision makers should remember that an ROI figure by itself is not a sufficient basis for choosing one action over another. An ROI figure says nothing about uncertainty or risk.  It simply shows how returns compare to costs if the hoped for results arrive.

ROI= Net Profit /total Investment costs

There are several ways to determine ROI, but this is the most frequent formula. A ROI is usually a presented as a percentage.

  1. EPS: EARNINGS PER SHARE

The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

EPS= (Net Income – Dividends on Preferred Stock) / Average outstanding shares.

Therefore you must look at EPS along with the ROI to determine if the company is using its capital efficiently

  1. PPM: PRIVATE PLACEMENT MEMORANDUM

A legal document used in the private placement industry that gives investors details about a company’s business plan, investment information, and other pertinent details. Private placements are offerings of stocks or bonds that institutions or accredited, wealthy individuals may participate in, but which the public at large is excluded from.

A Private Placement Memorandum allows issuers to disclose all facts of the company and the specifics of the investment transaction offered. Private placements memorandums are for private placements, while prospectuses are for publicly-traded issues.

Stayed tuned for Decoding Crowd Finance Part 2: Investment Structures.

 

Stayed tuned for Decoding Crowd Finance Part 2: Investment Structures.

Lauren LeibowitzPrincipal at 1st BridgeHouse Securities, LLC,

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