Why EBITDA is better than growth

SDA Bocconi Insight - Zoom On

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The most common objective shared by countless entrepreneurs and corporate executives is growth: boosting sales, broadening the customer base, expanding the product range, and breaking into new markets, perhaps by setting up new subsidiaries.

If we take the growth path of some companies and put it on a map of the world, we may end up with what looks like the board game Risk: to win you have to advance with your little tanks, adding more and more to your army, and plant your little flags to conquer as many countries as you can.

But the problem is that this kind of growth path does not always guarantee higher value of the company or greater satisfaction for shareholders.

Take the airline industry, for example. Often, we refer to it as one of the industries where companies did grow, adding production capacity and increasing invested capital to do so. But what they didn’t do was to secure a sufficient return on these new investments. In the end, the value of these airlines inevitably shrunk. The companies in this industry would have done better not to grow, and instead to focus on boosting the profitability of already up-and-running activities.





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