Earnings Before Interest, Taxation, Depreciation & Amortisation (EBITDA)
Why EBITDA should largely be ignored, be suspicious of any company highlighting EBITDA, Warren's & Charlie's colourful thoughts on EBITDA (video)
EBITDA has been a popular metric for quite a while now and is often presented with its variations such as EBITDA, EBITDAIF and so on.
It's used because it usually presents a far better picture of a company's financial position than would EBIT and it diverts attention from the actual reason that the company operates; to make a profit.
However, depreciation in particular is a real expense.
PPE especially and other assets are subject to use and consequently wear.
An example would be a truck and trailer operator. With a single truck things are going positively with good cash flow and earnings.
But in the background the unit has been wearing and one day the transmission blows and there's a bill for tens of thousands of dollars.
This was a real expense ticking away on the revenue statement and then it's suddenly realised.
Here is what the irascible Charlie Munger and his partner Warren Buffett think about EBITDA. Mr Munger calls them b******* earnings and rightly so:
Source: The Financial Review
Be suspicious of any company reporting EBITDA as the headline for a period’s results. It’s mentioned in the video that it’s often investment bankers who push managements and directors to highlight EBITDA because it usually carries higher figures.