What is Pro Forma, and what is Pro Forma EBITDA
Pro forma definition: Pro forma is a Latin term that means “for the sake of form” or “as a matter of form.”. Pro forma in business are documents that satisfy minimum requirements. Pro Forma EBITDA is an expected financial statement for a particular period of time that includes certain catalysts and events during that period. It is used to sell or buy a Pro Forma business. Normally it is used to calculate earnings before interest, taxes, depreciation, and amortization or EBITDA or revenue for a period of 12 months. The entry of a fresh market or a fresh product during that period is the catalyst for the buyers to calculate the Pro Forma EBITDA TTM and assume the possible EBITDA during 12 months when a fresh product was launched.
What is Pro forma statements?
Pro forma statements or proforma statements are financial reports for your business based on hypothetical scenarios.
What is the Pro forma income statement?
A Pro forma income statement or proforma income statement is just an income statement under certain assumptions with projections.
What is ProForma EBITDA?
The buyers usually calculate the free cash flow and the EBITDA rate or earnings before interest, taxes, depreciation, and amortization while assessing the worth of the business available for sale. For this purpose, buyers usually use the projected Pro forma of a growing business to normalize infrequent EBITDA or assessing the effect of the changes that occurred during that period.
For instance, if $5.0 million is the TTM EBITDA target of a company, they introduced a fresh product nearly four months ago, increasing its EBITDA by $200,000 every month. However, due to monthly expenses of $25,000, the company has closed its unit at that location after six months. Then the pro forma TTM EBITDA will be calculated by the buyer at $6.75. In this way, the company’s pro forma EBITDA for sale will include $1.6 million contributed by the new product to the previous eight months’ earnings. It helped the company save overheads up to $150,000 in six months before the office’s closure.
Benefits of analyzing Pro-Forma EBITDA
As discussed above, an investor can get a clear picture of a company’s operations through the figures show in its Pro forma EBITDA. In some cases, they can know about the nature of the company’s business and financial performance concerned more accurately with its pro forma earnings. Pro forma reports are used more in certain companies to show the characteristics of their industry. A significant amount of one-time charges are borne by a company when it undergoes a merger or a considerable restructuring. Such expenses can unfairly affect the company’s short-term profits as they are not considered ongoing costs. The investor can analyze the company’s pro forma earnings more appropriately while evaluating its long-term potentials by excluding the non-recurring expenses. Investment banks and corporate managers also prepare and use pro forma financial statements to evaluate their businesses’ future operating costs and evaluate their potential for the targeted takeovers.
In this way, pro forma EBITDA is a useful tool that can be used to analyze the changes in a company’s operations and identify the drivers of its core value. The information provided by the pro forma earnings can help in clarifying the things when a large amount of goodwill and asset depreciation is blurring the official earnings of a company.