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Ah! reminds me of the dot com bubble where everyone was profitable! ... uh by EBITDA [0]. A measure that caused all sorts of problems since a bunch of companies

Ah! reminds me of the dot com bubble where everyone was profitable! ... uh by EBITDA [0]. A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings [1]. For every cycle, the line swings back and forward between "grow at all costs" and "profit, profit, profit", with the associated attempts to create "silk purses out of a sow's ear" by using bad definitions. Not that this fools VC's or investor high-net-worths, since they know (and create) many of these games themselves. Every business should know profit by product/shipping-unit, line of business/division and overall (gross/net). If we don't know them, we're not running a business, we're running an experiment. Though I much prefer the phase when the industry is talking about "profit" at some level, rather than just buying temporary growth and selling it as "innovation". [0] https://en.wikipedia.org/wiki/Earnings_before_interest,_taxes,_depreciation,_and_amortization https://en.wikipedia.org/wiki/Earnings_before_interest,_taxe... [1] https://hbr.org/2009/11/how-ebidta-can-mislead/ https://hbr.org/2009/11/how-ebidta-can-mislead/

mbesto 10y ago
> A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings Just to be clear. EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. EBITDA is generally regarded as a very good metric to value a company (with a multiple of course). Any smart investor who gives a damn about their private company investment sniff shady EBITDA numbers out pretty quickly. The problem is, very few VCs actually go through this scrutiny or have incentives to provide a true indication of EBITDA. On the other hand, PE firms, who take a large stake in a business, typically do.
- slgeorge 10y ago
  > EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. Heh, I find it a bit difficult to consider it a useful measure, when (as you point out) you have to immediately clarify how it's calculated. It's like me saying "I'm a world champion sprinter" and then mumbling "as measured by positions in races between my desk and the downstairs loo". There are contexts for specialist use, but overall I'd avoid it. The article was referring to more general business use - PR & investment - I guess another situation where profitability comes up is candidates discussing whether an organisation they might join is profitable. I would argue that if someone uses EBITDA then it indicates that you should be asking lot more hard questions. Not that it's even the worse, as the article points out - my broader point is that every era comes up with new pet terms and ways of manipulating them for PR.
  - nopzor 10y ago
    Take two identical companies in the same business line in the same jurisdiction. One got a less favorable interest rate on the same amount of debt, and also has a higher effective tax rate. On a GAAP basis, these companies look very different. They should. They are. But, to someone trying to compare different companies for purposes of M&A, EBITDA can provide a nice way to normalize these factors. Debt can be refinanced. Effective tax rate != current tax rate. And that's just the EBIT part of EBITDA. You can't say EBITDA itself is not a useful measure. It is, when it's used properly and understood. However, I do agree with your overall sentiment re: manipulation. It's misused and misunderstood.
- kgwgk 10y ago
  > EBITDA itself is not the problem The problem with EBITDA is that it excludes any consideration of capital expenditures. Of course you can take that into account by tuning the multiple accordingly, but the same can be said of any valuation metric.

mbesto 10y ago

> A measure that caused all sorts of problems since a bunch of companies also manipulated their Earnings Just to be clear. EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. EBITDA is generally regarded as a very good metric to value a company (with a multiple of course). Any smart investor who gives a damn about their private company investment sniff shady EBITDA numbers out pretty quickly. The problem is, very few VCs actually go through this scrutiny or have incentives to provide a true indication of EBITDA. On the other hand, PE firms, who take a large stake in a business, typically do.

slgeorge 10y ago
> EBITDA itself is not the problem, but rather the calculation companies themselves use to derive it. Heh, I find it a bit difficult to consider it a useful measure, when (as you point out) you have to immediately clarify how it's calculated. It's like me saying "I'm a world champion sprinter" and then mumbling "as measured by positions in races between my desk and the downstairs loo". There are contexts for specialist use, but overall I'd avoid it. The article was referring to more general business use - PR & investment - I guess another situation where profitability comes up is candidates discussing whether an organisation they might join is profitable. I would argue that if someone uses EBITDA then it indicates that you should be asking lot more hard questions. Not that it's even the worse, as the article points out - my broader point is that every era comes up with new pet terms and ways of manipulating them for PR.
- nopzor 10y ago
  Take two identical companies in the same business line in the same jurisdiction. One got a less favorable interest rate on the same amount of debt, and also has a higher effective tax rate. On a GAAP basis, these companies look very different. They should. They are. But, to someone trying to compare different companies for purposes of M&A, EBITDA can provide a nice way to normalize these factors. Debt can be refinanced. Effective tax rate != current tax rate. And that's just the EBIT part of EBITDA. You can't say EBITDA itself is not a useful measure. It is, when it's used properly and understood. However, I do agree with your overall sentiment re: manipulation. It's misused and misunderstood.
kgwgk 10y ago
> EBITDA itself is not the problem The problem with EBITDA is that it excludes any consideration of capital expenditures. Of course you can take that into account by tuning the multiple accordingly, but the same can be said of any valuation metric.