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The tax break and branding make sense, but EBITDA seems like such a poor metric for valuation it's hard to understand why it's taken seriously. I'm guessing th

The tax break and branding make sense, but EBITDA seems like such a poor metric for valuation it's hard to understand why it's taken seriously. I'm guessing that point in the article was emphasized more by Money mag than by Buffet.

mbesto 12y ago
You do realize that a majority of all PE-type transactions are based on EBITDA multiples right? VC-type (the ones you and I read every day on TechCrunch) are multiples on users/revenues because they are high-growth. Duracell is not a high growth equity.
Havoc 12y ago
>EBITDA seems like such a poor metric for valuation Why? Its got stacks of research & history behind it so you'll have to provide something a bit more substantial than "it's hard to understand why it's taken seriously". In fact I'm struggling to see anything of substance in that post.
- waps 12y ago
  Well it's just like the government inflation "measurement". Everytime it shows something they don't like, they remove stuff. I believe oil was the first "WTF", then energy, and they just kept going. You see, according to the government, oil prices high or low don't affect the lives of Americans. Not that European governments did differently. Or that they stopped there. Then housing was removed. Americans don't see their budgets affected by housing, right ? Not according to the government. (this is talking about the measures the government reports, ie. Core CPI (previously) and PCE-Deflator (now)). I mean it's a question of degrees. Were the pre-1972 adjustments in the core CPI fraud ? No, not really. Then with oil you start to have this nagging feeling, and what they did last year ... well sorry to say, but that's cheating. That's fraud, no question about it. And EBITDA, sure. People used to use profit, for 50+ years. Then EBITDA. Why ? Because if you loan money for paying dividends or doing share buybacks profit will drop like a stone, EBITDA will be unaffected. But hell, if they had stopped there, that would have been reasonable. But they started cheating. Then came GAAP. This was modified 10 times over the last 2 decades or so, never to the advantage of investors of course, every single time it was to make companies look better than they did. And now most companies report non-GAAP EBITDA ... Differences are such things as that in non-GAAP future obligations (like a loan that's payment-free for a year) doesn't get counted until the payments start. Non-money agreements (e.g. we're going to build machines for X, they already paid 40% of the price, but we will only start delivery next quarter), the 40% is counted, the future obligation is not. I mean again there is a spectrum here. Profit vs EBITDA ... probably not fraud. GAAP "adjustments" ... I think we can all agree that this is very dangerous territory. Non-GAAP reporting, for me at least that crosses the line.
  - bd_at_rivenhill 12y ago
    Fudging the inflation numbers has been coming on for a while now; I call it the "screw the old people and the foreigners" strategy. As for the issues with GAAP, I can't understand why the holes in off-balance-sheet accounting haven't been closed given the number of disasters that have occurred. Government accounting, of course, is basically indistinguishable from bald-faced lying.
    - PhantomGremlin 12y ago
      > I call it the "screw the old people and the foreigners" strategy It's only half of the strategy. ZIRP is the other half. Not only is inflation being under-reported, the savings that "the old people" have can't keep up with inflation because the Fed is artificially holding interest rates at zero.
  - Havoc 12y ago
    I don't think you've quite understood the purpose of EBITDA. They aren't removing stuff they don't like, but rather factors that shouldn't be considered in valuing an equity share. Take the interest component - depending on the funding structure that will give you wildly different valuation numbers if you leave it in. Its simply not intended for use as a "type" of profit number in its raw form...its an input for a valuation technique. The valuation technique factors in things like you loaning money for dividends as a further input (if you're doing it right anyway) As for the GAAP issue - thankfully I operate on IFRS turf which seems to have less scary stuff than US GAAP from what I can tell.
    - waps 12y ago
      Interest is hard to take into valuation, agreed. Impossible, or "shouldn't", I disagree. An outstanding loan has a clear NPV (generally larger than the NPV of the loaned amount) ... just subtract from the value of the company. But if you do that, most companies come out wildly negative. I wonder if that has something to do with it. Of course there are thousand different loan types and various obligations companies may have that make this a subtle and very involved calculation. But it's certainly not impossible to value them, just hard. And ever since this was provided as an accepted loophole, I hope you can agree with me that it's been exploited a LOT by lots of companies.
- deleted 12y ago
  [deleted]
thegenius 12y ago
ebitda is not a poor metric for a stable business like duracell because interest charges (the most suspect component of ebitda) are not going to be wildly outside industry norms. it's also an interesting metric in general because it seeks to normalize true operating earning power across businesses if all other things were equal (tax rates, interest charges, fixed asset related charges). if you're evaluating a business and they tout ebitda as the only thing you should care about, you should look at net income in relation to it. for example, a mountain of debt or stupid financing terms would lead to high, maybe unsustainable, interest charges and ebitda would obscure the businesses' true circumstances. otherwise, it's reasonable to consider ebitda.
tim333 12y ago
"References to EBITDA make us shudder. Does management think the tooth fairy pays for capital expenditures?" - Warren Buffett in the 2000 letter to shareholders. You may be correct that the EBITDA stuff is more down to the journalist. I think EBITDA is taken seriously by speculators, leveraged buy out operators and the like because they hope to flip the thing to some other suckers fast enough that they can ignore depreciation. For long term owners though it is important.

mbesto 12y ago

You do realize that a majority of all PE-type transactions are based on EBITDA multiples right? VC-type (the ones you and I read every day on TechCrunch) are multiples on users/revenues because they are high-growth. Duracell is not a high growth equity.

Havoc 12y ago

>EBITDA seems like such a poor metric for valuation Why? Its got stacks of research & history behind it so you'll have to provide something a bit more substantial than "it's hard to understand why it's taken seriously". In fact I'm struggling to see anything of substance in that post.

waps 12y ago
Well it's just like the government inflation "measurement". Everytime it shows something they don't like, they remove stuff. I believe oil was the first "WTF", then energy, and they just kept going. You see, according to the government, oil prices high or low don't affect the lives of Americans. Not that European governments did differently. Or that they stopped there. Then housing was removed. Americans don't see their budgets affected by housing, right ? Not according to the government. (this is talking about the measures the government reports, ie. Core CPI (previously) and PCE-Deflator (now)). I mean it's a question of degrees. Were the pre-1972 adjustments in the core CPI fraud ? No, not really. Then with oil you start to have this nagging feeling, and what they did last year ... well sorry to say, but that's cheating. That's fraud, no question about it. And EBITDA, sure. People used to use profit, for 50+ years. Then EBITDA. Why ? Because if you loan money for paying dividends or doing share buybacks profit will drop like a stone, EBITDA will be unaffected. But hell, if they had stopped there, that would have been reasonable. But they started cheating. Then came GAAP. This was modified 10 times over the last 2 decades or so, never to the advantage of investors of course, every single time it was to make companies look better than they did. And now most companies report non-GAAP EBITDA ... Differences are such things as that in non-GAAP future obligations (like a loan that's payment-free for a year) doesn't get counted until the payments start. Non-money agreements (e.g. we're going to build machines for X, they already paid 40% of the price, but we will only start delivery next quarter), the 40% is counted, the future obligation is not. I mean again there is a spectrum here. Profit vs EBITDA ... probably not fraud. GAAP "adjustments" ... I think we can all agree that this is very dangerous territory. Non-GAAP reporting, for me at least that crosses the line.
- bd_at_rivenhill 12y ago
  Fudging the inflation numbers has been coming on for a while now; I call it the "screw the old people and the foreigners" strategy. As for the issues with GAAP, I can't understand why the holes in off-balance-sheet accounting haven't been closed given the number of disasters that have occurred. Government accounting, of course, is basically indistinguishable from bald-faced lying.
  - PhantomGremlin 12y ago
    > I call it the "screw the old people and the foreigners" strategy It's only half of the strategy. ZIRP is the other half. Not only is inflation being under-reported, the savings that "the old people" have can't keep up with inflation because the Fed is artificially holding interest rates at zero.
- Havoc 12y ago
  I don't think you've quite understood the purpose of EBITDA. They aren't removing stuff they don't like, but rather factors that shouldn't be considered in valuing an equity share. Take the interest component - depending on the funding structure that will give you wildly different valuation numbers if you leave it in. Its simply not intended for use as a "type" of profit number in its raw form...its an input for a valuation technique. The valuation technique factors in things like you loaning money for dividends as a further input (if you're doing it right anyway) As for the GAAP issue - thankfully I operate on IFRS turf which seems to have less scary stuff than US GAAP from what I can tell.
  - waps 12y ago
    Interest is hard to take into valuation, agreed. Impossible, or "shouldn't", I disagree. An outstanding loan has a clear NPV (generally larger than the NPV of the loaned amount) ... just subtract from the value of the company. But if you do that, most companies come out wildly negative. I wonder if that has something to do with it. Of course there are thousand different loan types and various obligations companies may have that make this a subtle and very involved calculation. But it's certainly not impossible to value them, just hard. And ever since this was provided as an accepted loophole, I hope you can agree with me that it's been exploited a LOT by lots of companies.
deleted 12y ago
[deleted]

thegenius 12y ago

ebitda is not a poor metric for a stable business like duracell because interest charges (the most suspect component of ebitda) are not going to be wildly outside industry norms. it's also an interesting metric in general because it seeks to normalize true operating earning power across businesses if all other things were equal (tax rates, interest charges, fixed asset related charges). if you're evaluating a business and they tout ebitda as the only thing you should care about, you should look at net income in relation to it. for example, a mountain of debt or stupid financing terms would lead to high, maybe unsustainable, interest charges and ebitda would obscure the businesses' true circumstances. otherwise, it's reasonable to consider ebitda.

tim333 12y ago

"References to EBITDA make us shudder. Does management think the tooth fairy pays for capital expenditures?" - Warren Buffett in the 2000 letter to shareholders. You may be correct that the EBITDA stuff is more down to the journalist. I think EBITDA is taken seriously by speculators, leveraged buy out operators and the like because they hope to flip the thing to some other suckers fast enough that they can ignore depreciation. For long term owners though it is important.