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Forbes: EBITDA Is 'BS' Earnings

In an old article dated 2014, Brent Beshore lays out his perception of EBITDA and how according to people like Warren Buffet it means absolutely nothing.

http://www.forbes.com/sites/brentbeshore/2014/11/13/ebitda-is-bs-earnings

What's your opinion?

Answers

Mark Sutherland
Title: CFO
Company: Profit By Design CFO & Controller Servic..
(CFO, Profit By Design CFO & Controller Services) |

Wayne, you made my day because this author articulates my frustrations as a CFO with the "DA" in EBITDA and virtually everyone I discuss this subject with, including every CEO I've worked for. I've never understood how anyone thinks CAPEX maintenance is not relevant in evaluating a company's earning capacity and sustainability. I especially like the authors comments:

1)"When evaluating a business, I break depreciation down into three categories. The first is depreciation as an average proxy for maintenance CAPEX, or the amount of reinvestment necessary to keep the business level."

2)"Like any other metric, the goal of looking at depreciation is to understand the risks, rewards, and likelihood for outcomes. If a company has an EBITDA of $2 million, yet spends $2 million per year on new equipment to merely stay open, that’s a terrible business. Conversely, a business with $2 million of EBITDA and very little capital expenditure certainly looks attractive..."

3)"What I want to know is what cash earnings — after accounting for some normal level of capital spending — am I getting versus price paid?"

The statement "...EBITDA as a proxy for cash flow..." is absurd to me. How about using "Cash Flow", or better yet "Free Cash Flow" as a proxy for cash flow? The reason is because a)People trying to sell you their business by pushing EBITDA don't want you to see what their cash flow really is, and b)many buyers don't understand how to read a cash flow statement or know how to calculate free cash flow. Every time I bring up these issues in the midst of an acquisition, I get looked at like I'm from Mars, as if any moron should know that EBITDA is the holy grail of earnings evaluation. Cash flow, cash flow, cash flow. Thanks Wayne.

Jeff McGlaughlin
Title: Corporate Controller
Company: Withheld
(Corporate Controller, Withheld) |

In reading the original article, I believe the authors would have the same problems with free cash flows as they have with EBITDA.

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

Hmmmmmmmmmmmmm,

I've had other execs tell me that depreciation is just an accounting gimmick.

Arrrrrrrrrrrrrrrggggggggggggggggggggghhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Ross Anderson, CPA, MBA
Title: Controller
Company: TFS Capital
(Controller, TFS Capital) |

I second the author's opinion, albeit to traders it may be used as some sort of indicator in evaluating whether to purchase, short, or take no actions on a stock.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

To be fair to traders, they will use ANY reason/indicator (to include the CEO sneezed).

Jeff McGlaughlin
Title: Corporate Controller
Company: Withheld
(Corporate Controller, Withheld) |

I wouldn't say it means "absolutely nothing". It's a data point, just like many other data points. It is one of any number of useful numbers when evaluating a company's performance. Some other measures are better, and some are worse.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I find it interesting (and I realize this was not the focus of the article) is the quality of the human assets, the product/service, R&D, etc, but then Jeff id say " It is one of any number of useful numbers when evaluating a company's performance. ".

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

As always, it's the bottom line that matters. Anything else is just noise......or wishful thinking.

Brian Vogel
Title: Principal/Consultant
Company: Avail Financial Consulting
(Principal/Consultant, Avail Financial Consulting) |

IMO, cash flow is more important than 'bottom line' - what ever that bottom line may be - NI, EBT, EBIT, EBITDA. There are so many accounting rules that can distort earnings, but what really matters is if the business generates cash.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Interesting view point (I agree, BTW). The ever-changing GAAP, where most investors and creditors don't even know what the changes are, what they do and how they really effect the bottom line are to blame.

NI is nice, but your company runs on cash... But again, there are other values involved in how profitable (sic Cash Generation) you will be, because the generation of cash depends on people, ideas, market and sound business planning - long-term, mid-term and short-term, etc.

Mike Adhikari
Title: Owner
Company:
(Owner, ) |

There is no single metric that can fully explain value. However, EBITDA is better than anything else. All other line items below EBITDA adds non-operating variables.

EBITDA is the true profit of the ASSETS of the company. But, EBITDA is not the true profit of the COMPANY.

A business with negative Earnings can be a healthy business; the one with negative EBITDA cannot be.

EBITDA is not subject to financing, and is not subject to majority of the accounting polices and regulations.

From an M&A perspective EBITDA is a better, but by no means sufficient, metric. However, from a passive investor perspective EBITDA is not a good metric. My guess is that Warren Buffet statement (which I think is actually made by his side kick, Charles Munger) is meant for Berkshire's typical passive investments, where cash flow (distributable cash flow i.e. dividend) is more important. [In my M&A practice I once met an executive who worked for one of Buffet's manufacturing companies. He said that all operating reviews by Buffet team and all acquisition targets were focused on EBITDA beyond reasonableness.]

EBITDA is not subject to DA accounting policies; EBIT is. [It can be argued that EBITDA is subject to some accounting policies (e.g. inventory policy, reserves). But these policies impact all metrics, not just the EBITDA. May be the proper statement is ...EBITDA is least subject to accounting policies.]

Most people think cash flow is the most important. However, cash flow is subject to more variables. For example, 1) EBITDA goes down, but CF goes up b/c of high A/R collection, 2) EBITDA goes up, but CF goes down b/c of CapX investment, 3) EBITDA goes up, but CF goes down b/c of debt pay down, etc.

I teach this subject in the CM&AA class (Certified M&A Advisors). We will have our 50th class soon. I have refined my thoughts on the EBITDA subject based on input from the CFOs, I-bankers and CPAs in the class.

I am still learning.

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