EBITDA (or earnings before interest, taxes, depreciation, and amortization) is one of the important measures of a company’s financial performance. EBITDA is calculated as revenue less expenses.
Importance of EBITDA
EBITDA is an important financial parameter for large companies with significant assets and for companies with a high amount of leverage on the balance sheet. For small companies with low leverage, it is not really a useful evaluation tool.
The homebuilding industry is a highly capital intensive industry, and in most cases requires a high amount of leverage to run the business. Thus, EBITDA becomes a more important tool for evaluation of financial performance of homebuilders. Since EBITDA gives an idea of the earnings of a company independent of its capital structure, the EBITDA margin is also useful for a peer group comparison.
Homebuilders’ EBITDA margin
D.R. Horton’s EBITDA margin was at 10.1% as on March 2015, much better compared to 2.3% for fiscal 2011. Though D.R. Horton’s EBITDA margin improved over the past five years, it is still a bit lower compared to its major competitors. For example, Lennar’s (LEN) EBITDA margin was 12.7% during the same period, followed by Pulte Group (PHM) at 12.67% and Toll Brothers (TOL) at 12.6%. KB Homes (KBH) is the only laggard in the pack with an EBITDA margin of 4.6%.
The rising construction cost is one of the major culprits in preventing a sharp bounce back in D.R. Horton’s EBITDA margin after the recent depression in the homebuilding market. Apart from this, another major reason for D.R. Horton’s (DHI) lower EBITDA margin among its peer group is the target segment of the company. The company’s product strategies with focus on entry-level and lower margin segments is adversely affecting its margin.
Investors who are interested in trading the sector as a whole should look at the SPDR S&P Homebuilders ETF (XHB).