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I agree with these examples, but to avoid taking the principle too far: EBIDTA was once a made up metric. Sometimes new views of a system do enrich our understa
by jrvarela56 4y ago
I agree with these examples, but to avoid taking the principle too far: EBIDTA was once a made up metric. Sometimes new views of a system do enrich our understanding.
Check the "John Malone and the Invention of EBITDA" section in this post for the story of how it was created: https://commoncog.com/blog/cash-flow-games/ https://commoncog.com/blog/cash-flow-games/
- hammock 4y agoThe timing (1972) of the invention of EBITDA is interesting. It would seem EBITDA was not used for thousands of years and was not useful until the end of the gold standard in 1971 and the beginning of a new era of central bank currency manipulation Edit: bring on the downvotes without context. Or, engage meaningfully: what conditions existed that enabled EBITDA to emerge as an invention and gain traction?
- cuteboy19 4y agoI choose to believe EBITDA exists because of Bangladesh, which also came into existence in 1971. In fact if you track the prominence of EBITDA and the GDP of Bangladesh, the correlation is crystal clear In any case crypto is far more manipulated than any normal currency thanks to BitfinexTether.
- deleted 4y ago[deleted]
- AlexandrB 4y agoCan you elaborate? How are these things connected? Why wouldn't EBITDA be a useful financial framing for "growth" companies while the country was on the gold standard? Just because it happened around the same time, doesn't mean there's any causal relationship here.
- hammock 4y agoWall Street newly accepting EBITDA (cash flows) over DTI or net income, as told in the link above about the cable utility, is logical in an environment of a rapidly expanding money supply driven by unencumbered Federal Reserve. In the loose/free money era, financing cash flows with more and more debt is incentivized and in some respects the default mode of operation. Growth over value. Alternately, when the credit environment tightens, you see moves back to value and away from growth
- clairity 4y agonote that EBITDA isn't directly equivalent to cash flows, and can be wildly different depending on how creative the accounting is. EBIT/EBITDA can be useful is some comparative valuation exercises as an idealized cash flow substitute (especially when comparing companies or time periods under differing tax regimes), but it's not actual cash in minus cash out, as the term "cash flow" implies.
- seoaeu 4y agoHow do you know that Dwayne Johnson didn’t cause EBITDA? He was born in 1972 so the timing fits even better than the ending of the gold standard
- vintermann 4y agoIt's annoying how "everything bad happens because we abandoned the gold standard" is being pushed hard. A lot of other things happened around 1970, you know? It's a lot more plausible to me that "the rise of international finance", from immensely improved communication, caused both the abandoment of the gold standard and novel ways to estimate future profit.
- justin66 4y agoEarlier this morning for some reason Youtube recommended a video that was funny and relevant, called Charlie Munger: 'Every time you hear 'EBITDA' substitute it with 'bull** earnings'' https://www.youtube.com/watch?v=l82kIjqBtqw https://www.youtube.com/watch?v=l82kIjqBtqw
- jrvarela56 4y agoHaha I see your appeal to authority and raise you another: besides Malone (billionaire) the other famous example for EBIDTA is Jeff Bezos (and many others I'm sure). Jeff Bezos was always criticized because Amazon was 'unprofitable'. He was just playing a similar strategy to Malone's and mocked journalists who didn't understand what he was up to.
- lamontcg 4y agoBezos was all about free cash flow.
- jrvarela56 4y agoSo was Malone, the point is to maximize cashflow but minimize profits to avoid taxes and compound the growth.
- credit_guy 4y agoIf you care about EBITDA at all, then you must watch the "why have you not sold the bonds yet" video https://vimeo.com/20109796 https://vimeo.com/20109796
- oh_my_goodness 4y agoI'd go even further. EBITDA is still a made-up metric.
- jmonger 4y agoThose pesky expenses always getting in the way.
- Animats 4y ago"Earnings before all the bad stuff". Have you ever seen an annual report where "adjustments to earnings" made the earnings worse?
- deleted 4y ago[deleted]
- xboxnolifes 4y agoAll metrics are made up. Some of them are useful.
- jjeaff 4y agoSome metrics are made up for the purpose of better understanding and some are made up for the purpose of obfuscation and manipulation.
- skinnymuch 4y agoIntent matters. EBITDA intent is not rock solid.
- RC_ITR 4y agoEBITDA was new, but free cash flow was GAAP and everything good about EBITDA is captured in “it’s an easy way to estimate free cash flow” Everything else about EBITDA is sort of fraud.
- simonebrunozzi 4y agoOne of the best reads ever. The post is worth re-reading every few months.