firmorenterprisevalue,themeasuresofearningsthatweuse
havetorelatetotheentirefirm.Threemeasuresofoperating
earnings are potential candidates:
- Earnings before interest, taxes, depreciation, and
amortization (EBITDA). This can be considered an
approximate measure of the cash flow generated by the
operatingassetsofthefirm,priortotaxesandreinvestment
needs.
2.Earningsbeforeinterestandtaxes(operatingincome).This
isamoreconventionalmeasureofaccountingearningsfrom
operating assets, albeit prior to taxes.
3.Earningsbeforeinterestbutaftertaxes(after-taxoperating
income).Thisconvertstheoperatingincomeintoanafter-tax
value.
Allthreeofthesemeasuresarepriorto earningsfromcash
holdings and income from minority holdings in other
companies.Ifthemeasuresofearningsthatweusearejustfor
theparentcompany(andthusunconsolidated),themeasureof
valuethatweuseshouldreflectonlytheparentcompanyand
shouldnetoutnotonlythecashholdingsbutalsothevalueof
all cross holdings, minority as well as majority. When
workingwithconsolidatedearnings,weshoulduseameasure
offirmvaluethatnetsout cashandminority holdings,but
includestheentire majorityholding.Table 9.1summarizes
the choices.
TABLE 9.1Value Measures and Earnings from Operations