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.
Homebuilding is a highly capital-intensive industry and in most cases, it requires a high amount of leverage to run the business. Thus, EBITDA becomes all the more important for evaluation of homebuilders’ financial performance. Since EBITDA gives an idea of the earnings of a company independent of its capital structure, EBITDA margin is also useful for a peer group comparison.
PulteGroup’s EBITDA margin is the highest among peers
PulteGroup’s (PHM) EBITDA margin was one of the highest among its peer group at 12.7% for fiscal 2014 compared to 11.4% in 2013. In fact, the EBITDA margin recorded by the company for fiscal 2014 was the highest in a decade. Lennar’s (LEN) EBITDA margin was 12.67% during the same period, followed by Toll Brothers (TOL) at 12.6%, and D.R. Horton (DHI) at 10.1%. KB Homes (KBH) is the only laggard in the pack with an EBITDA margin of 4.6%. The higher EBITDA margin in recent years was mainly due to PulteGroup’s strategy of cost control and a change in product mix to target move-up buyers, which yielded a higher average selling price.
The margin expansion in recent years came on the back of a negative EBITDA margin between 2007 and 2011. The negative margin during that period was mainly a result of declining home sales, lower average sales price, and higher cost of construction materials.
Investors looking for diversification in the homebuilding sector can get exposure in homebuilding ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).