Yet, free cash flow numbers are not available for all companies. European firms, for example, historically have published only profit figures. Therefore, we also look at EBIT and EBITDA figures. Of these two the latter is preferred because it deducts cash that is needed to maintain the operations. Specifically, on the macro level we use pre-tax profits with inventory adjustment and capital consumption adjustment, and add net interest payments to end up with an aggregate measure of EBITDA. The ratio of debt to EBITDAbehaves similar to the debt to cash flow metric, albeit it is considerably more volatile. Part of this volatility is induced by the degrees of freedom related to the accounting of depreciations and amortizations.
To forecast profits, one should look at margins and the macroeconomic prospects for growth. Popular proxies for profit margins are the difference between annual percentage changes in the GDP deflator and unit labor costs, and Merrill Lynch’s corporate misery index.