Definition:

3-year EBITDA Growth Rate measures the compound annual growth rate (CAGR) of a company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) over a three-year period. It indicates how much the company's EBITDA has grown annually over the specified timeframe.

Formula:

3-year EBITDA Growth Rate = [(EBITDA at end of Year 3 / EBITDA at start of Year 1) ^ (1/3)] - 1

How to use the metric:

This metric is used by investors and analysts to assess a company's operational performance and growth potential over a medium-term period. A higher growth rate suggests that the company is expanding its earnings capacity, which can be a positive indicator for future profitability and investment potential.

Limitations:

The 3-year EBITDA Growth Rate does not account for external factors such as market conditions or industry changes that might affect EBITDA. It also does not consider the quality of earnings or one-time events that could inflate or deflate EBITDA figures. Additionally, it does not provide insight into the company's cash flow or profitability beyond EBITDA.

Applies to:

This metric is particularly useful in industries where EBITDA is a key performance indicator, such as manufacturing, retail, and telecommunications, where capital expenditures and non-cash items can significantly impact net income.

Doesn't apply to:

Industries with highly volatile earnings or those heavily reliant on intangible assets, such as technology startups or pharmaceutical companies, may not find this metric as useful. This is because EBITDA may not accurately reflect the economic reality of these businesses due to high R&D costs or irregular revenue streams.

Summary:

The 3-year EBITDA Growth Rate is a valuable metric for evaluating a company's operational growth over a medium-term period. While it provides insights into the company's ability to increase earnings, it should be used in conjunction with other financial metrics to gain a comprehensive understanding of the company's financial health and performance.