8 ms·

EBITDA in a non-comparison context is meaningless. EBITDA is only useful when you're comparing ownership of two like businesses. What is interest, if not an ex

EBITDA in a non-comparison context is meaningless. EBITDA is only useful when you're comparing ownership of two like businesses. What is interest, if not an expense? What is tax, if not an expense? What is depreciation if not an expense? Alright, amortization, yeah, that one could get added back in – I buy that. Whenever someone starts talking about EBITDA, check your wallet.

swamp40 5y ago
Why can't the comparison context be from one year to the next year?
- ericmay 5y ago
  Because your choice isn't "invest or not" but invest relative to other potential investments in the marketplace.
  - mbesto 5y ago
    The parent comment is right. EBITDA is used for both industry comparison as well as YoY trends. For YoY it's used to try to eliminate "noise".
    - ericmay 5y ago
      YoY trends don't matter in isolation as you're trying to decide to make an investment.
      - mbesto 5y ago
        > YoY trends don't matter in isolation as you're trying to decide to make an investment. What. You 100% can make investing decisions in isolation. I don't think this is what you meant you say, because this makes absolutely no sense at all. If someone comes to me and says "if you give me a dollar today, I'll give you $10 tomorrow" I really don't need to consider anything else. Sure, someone else might say "I'll give you $11 instead", but if the deal is there and I can analyze that the risk of default is minimal, then I can absolutely make that decision in isolation.
        ericmay 5y ago
        We must be talking past each other. I have no idea what you're talking about. What do you mean by you can make a decision in isolation? How would you know that giving someone a dollar for 10 dollars tomorrow is a good investment unless you have other investments or investment opportunities to compare it to? And even so, how would you construct a life such that you were naive to all investment opportunities until this single one arises? It doesn't make sense.
        mbesto 5y ago
        > I have no idea what you're talking about. Clearly. I said: - EBITDA is used for both comparison and YoY trends You replied: - YoY trends don't matter in isolation All of my clients (PEGs) used EBITDA both as a tool to normalize YoY trends and to do like for like comparisons of comparable assets. Ultimately this is to evaluate whether they want to make an investment or not. Since you cared to provide some contradictory clarification to my comment, I can only assume you were disagreeing that EBITDA can only be used for comparative measures, which is 100% not true as per practice. Hence my example was that in theory you could make an investment decision in isolation (as naive as that might be).
        ericmay 5y ago
        I think the person in the OP edited their post. They no longer mention YoY changes which is what the comment I replied to was asking about and I responded to. All I was saying is that you have to have context and something to compare the YoY to and you can't simply look at a YoY growth rate. It's literally meaningless to do so without comparables. It's like saying the velocity of something is 50, ok who cares unless you can tell me how it relates to some other thing. If a company grows 100% YoY I don't care without information relating it to other investment options. 100% could very well be really bad unless I know what is normal, below average, above average, etc. So idk what's really going on here anymore. I think something has become confused that's causing this conversation to go in useless circles.
lumost 5y ago
Isn't EBITDA the number of greater interest to institutional investors such as Private Equity funds? Interest could be irrationally expensive for a business, taxes could be higher than they should be if the entity is not setup correctly, Amortization represents assets which could be sold off. These are all things that PE firms can fix/work on to one extent or another with financial engineering. They can't really grow cash flow.
- mywittyname 5y ago
  PE usually look to load up the company they acquire with debt to cover their purchase price. EBITDA gives them a good idea of how much debt the company can service via cashflow.
JCM9 5y ago
The point of these things is that there are strict rules on what counts and what doesn’t do it’s a measurement that has some common degree of understanding. It’s far from perfect, but absent these things companies have a habit of making up BS metrics to make the company look healthy (remember “Community Adjusted EBITDA”) when the standard metrics would call the company’s financial health into question. These metrics companies like to put out there, not surprisingly, tend to be something along the lines of “look at all the profit we’re making if you for a moment ignore all the reasons why our business model is not profitable.”
mbesto 5y ago
1) It's adjusted EBITDA which makes it even more meaningless. > What is interest, if not an expense? What is tax, if not an expense? What is depreciation if not an expense? Alright, amortization, yeah, that one could get added back in – I buy that. 2) There is a specific reason these get taken out, because they generally represent values that the company either has little control over (taxes) or represent episodic expenditures (capital purchases, or debt raises) that have meaningful life greater than 1 year. D/A are essentially synonymous. So, no, D/A are not expenses, because they are simply representations of capital expenditures shown as expenses (the distinction is important) throughout the useful life the asset (intangible or tangible). Easy way to illustrate this is an airline who buys an airplane in year 1 and then uses that plane for 30 years. If EBITDA wasn't useful, then calculating their earnings over a period time won't tell you anything about trends of the business health. The devil is in the details. EBITDA is not all that bad, it's just not a "one figure to rule them all", especially since most firms create an "Adjusted" version of it to fit some narrative (and they always do). To your point. The cashflow statement is much more important IMHO.
- RC_ITR 5y ago
  The reason EBITDA became popular is because private equity firms had low cost of borrowing (e.g., they would manipulate I expense) and were good at financial engineering such that tax rates could easily become 0 in the short term. D and A are excluded because they’re not cash. Then, people just sort of adopted EBITDA as shorthand for “FCF from operations” and then companies like Allbirds took advantage of that to do whatever they want with it.
  - mbesto 5y ago
    > Then, people just sort of adopted EBITDA as shorthand for “FCF from operations” Very true. > then companies like Allbirds took advantage of that to do whatever they want with it. Here's an insider secret - everyone manipulates Adj. EBITDA (not just "Allbirds like companies"). It's part of the game of business sellers, which is why buy-side auditing is so important to get right. This is more or less why public security analysts exist - to keep pressure on proper reporting from the company. If WeWork actually went public every analyst worth a salt would basically throw out their "Community Adjusted EBITDA" and the term would be rendered meaningless.
cliftonk 5y ago
EBITDA is a useful measure for understanding how much cash a business generates if you were to strip it down. E.g. EV/ebitda is the most widely multiple for buyouts and most accurately takes into account operating leverage. It’s less useful for a business like this, but saying “ebitda is a scam” is illiterate.
addicted 5y ago
EBITDA is a good measure of the upper bound of the earning potential of the current business. And you're also right in that it's useful for comparing with similar companies. It's greatest value is in the variety of ratios that it slots into. If 2 similar companies have very different EBITDA/Revenue ratios, e.g., that would indicate that the company with the lower EBITDA/rev ratio is probably less efficiently run.

swamp40 5y ago

Why can't the comparison context be from one year to the next year?

ericmay 5y ago
Because your choice isn't "invest or not" but invest relative to other potential investments in the marketplace.
- mbesto 5y ago
  The parent comment is right. EBITDA is used for both industry comparison as well as YoY trends. For YoY it's used to try to eliminate "noise".
  - ericmay 5y ago
    YoY trends don't matter in isolation as you're trying to decide to make an investment.
    - mbesto 5y ago
      > YoY trends don't matter in isolation as you're trying to decide to make an investment. What. You 100% can make investing decisions in isolation. I don't think this is what you meant you say, because this makes absolutely no sense at all. If someone comes to me and says "if you give me a dollar today, I'll give you $10 tomorrow" I really don't need to consider anything else. Sure, someone else might say "I'll give you $11 instead", but if the deal is there and I can analyze that the risk of default is minimal, then I can absolutely make that decision in isolation.
      - ericmay 5y ago
        We must be talking past each other. I have no idea what you're talking about. What do you mean by you can make a decision in isolation? How would you know that giving someone a dollar for 10 dollars tomorrow is a good investment unless you have other investments or investment opportunities to compare it to? And even so, how would you construct a life such that you were naive to all investment opportunities until this single one arises? It doesn't make sense.
        mbesto 5y ago
        > I have no idea what you're talking about. Clearly. I said: - EBITDA is used for both comparison and YoY trends You replied: - YoY trends don't matter in isolation All of my clients (PEGs) used EBITDA both as a tool to normalize YoY trends and to do like for like comparisons of comparable assets. Ultimately this is to evaluate whether they want to make an investment or not. Since you cared to provide some contradictory clarification to my comment, I can only assume you were disagreeing that EBITDA can only be used for comparative measures, which is 100% not true as per practice. Hence my example was that in theory you could make an investment decision in isolation (as naive as that might be).
        ericmay 5y ago
        I think the person in the OP edited their post. They no longer mention YoY changes which is what the comment I replied to was asking about and I responded to. All I was saying is that you have to have context and something to compare the YoY to and you can't simply look at a YoY growth rate. It's literally meaningless to do so without comparables. It's like saying the velocity of something is 50, ok who cares unless you can tell me how it relates to some other thing. If a company grows 100% YoY I don't care without information relating it to other investment options. 100% could very well be really bad unless I know what is normal, below average, above average, etc. So idk what's really going on here anymore. I think something has become confused that's causing this conversation to go in useless circles.

lumost 5y ago

Isn't EBITDA the number of greater interest to institutional investors such as Private Equity funds? Interest could be irrationally expensive for a business, taxes could be higher than they should be if the entity is not setup correctly, Amortization represents assets which could be sold off. These are all things that PE firms can fix/work on to one extent or another with financial engineering. They can't really grow cash flow.

mywittyname 5y ago
PE usually look to load up the company they acquire with debt to cover their purchase price. EBITDA gives them a good idea of how much debt the company can service via cashflow.

JCM9 5y ago

The point of these things is that there are strict rules on what counts and what doesn’t do it’s a measurement that has some common degree of understanding. It’s far from perfect, but absent these things companies have a habit of making up BS metrics to make the company look healthy (remember “Community Adjusted EBITDA”) when the standard metrics would call the company’s financial health into question. These metrics companies like to put out there, not surprisingly, tend to be something along the lines of “look at all the profit we’re making if you for a moment ignore all the reasons why our business model is not profitable.”

mbesto 5y ago

1) It's adjusted EBITDA which makes it even more meaningless. > What is interest, if not an expense? What is tax, if not an expense? What is depreciation if not an expense? Alright, amortization, yeah, that one could get added back in – I buy that. 2) There is a specific reason these get taken out, because they generally represent values that the company either has little control over (taxes) or represent episodic expenditures (capital purchases, or debt raises) that have meaningful life greater than 1 year. D/A are essentially synonymous. So, no, D/A are not expenses, because they are simply representations of capital expenditures shown as expenses (the distinction is important) throughout the useful life the asset (intangible or tangible). Easy way to illustrate this is an airline who buys an airplane in year 1 and then uses that plane for 30 years. If EBITDA wasn't useful, then calculating their earnings over a period time won't tell you anything about trends of the business health. The devil is in the details. EBITDA is not all that bad, it's just not a "one figure to rule them all", especially since most firms create an "Adjusted" version of it to fit some narrative (and they always do). To your point. The cashflow statement is much more important IMHO.

RC_ITR 5y ago
The reason EBITDA became popular is because private equity firms had low cost of borrowing (e.g., they would manipulate I expense) and were good at financial engineering such that tax rates could easily become 0 in the short term. D and A are excluded because they’re not cash. Then, people just sort of adopted EBITDA as shorthand for “FCF from operations” and then companies like Allbirds took advantage of that to do whatever they want with it.
- mbesto 5y ago
  > Then, people just sort of adopted EBITDA as shorthand for “FCF from operations” Very true. > then companies like Allbirds took advantage of that to do whatever they want with it. Here's an insider secret - everyone manipulates Adj. EBITDA (not just "Allbirds like companies"). It's part of the game of business sellers, which is why buy-side auditing is so important to get right. This is more or less why public security analysts exist - to keep pressure on proper reporting from the company. If WeWork actually went public every analyst worth a salt would basically throw out their "Community Adjusted EBITDA" and the term would be rendered meaningless.

cliftonk 5y ago

EBITDA is a useful measure for understanding how much cash a business generates if you were to strip it down. E.g. EV/ebitda is the most widely multiple for buyouts and most accurately takes into account operating leverage. It’s less useful for a business like this, but saying “ebitda is a scam” is illiterate.

addicted 5y ago

EBITDA is a good measure of the upper bound of the earning potential of the current business. And you're also right in that it's useful for comparing with similar companies. It's greatest value is in the variety of ratios that it slots into. If 2 similar companies have very different EBITDA/Revenue ratios, e.g., that would indicate that the company with the lower EBITDA/rev ratio is probably less efficiently run.