What is the initial step in enterprise valuation?

The initial step in enterprise valuation involves determining a company’s operating performance and ability to generate cash flow, which makes starting with EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) a fundamental choice. EBITDA serves as a proxy for cash flow from operations and provides a clearer picture of the company's profitability without the influence of capital structure, tax strategies, or non-cash accounting items.

By using EBITDA, analysts can assess the company's operational efficiency, making it easier to compare performance across different firms irrespective of their financing options and tax jurisdictions. This approach sets the foundation for further valuation analyses, such as applying multiples for comparison with similar firms or discounting future cash flows to their present value.

In the context of enterprise valuation, understanding EBITDA is paramount, as it highlights the core earning power of the business, allowing for a more informed assessment of its value in subsequent calculations.