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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",

by 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.
  - Havoc 12y ago
    Very tempted to harshly criticize at this stage, but let me instead suggest that you take a formal varsity level class in valuations to improve your understanding of it. You've got the entire thing 100% back to front and its definitely not something I can explain via HN comments. Discussing it with a lecturer would be a better medium.
fulafel 12y ago
Where does this inflation-hiding meme come from? The first federal government source from Google is http://www.bls.gov/cpi/ http://www.bls.gov/cpi/ and over there the first number is the "all items" number, then the "less food and energy" number. It's not like they're trying to hide the all-items number. And the all-items number is the number used for things like cost-of-living adjustments. If you look at a graph that shows both numbers, you see that they are on about the same level on average, just with more volatility in the all-items graph. Which is why economists like to use it for some things, they don't want the noise that comes from commodity price volatility and they want to see the "sticky" prices that show the direction where the inertia of inflation is headed. Graph: http://www.investing.com/analysis/is-us-inflation-headed-higher-210303 http://www.investing.com/analysis/is-us-inflation-headed-hig... Further explanation: http://krugman.blogs.nytimes.com/2013/04/30/still-coring-after-all-these-years/ http://krugman.blogs.nytimes.com/2013/04/30/still-coring-aft...

by waps 12y ago

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.
- Havoc 12y ago
  Very tempted to harshly criticize at this stage, but let me instead suggest that you take a formal varsity level class in valuations to improve your understanding of it. You've got the entire thing 100% back to front and its definitely not something I can explain via HN comments. Discussing it with a lecturer would be a better medium.

fulafel 12y ago

Where does this inflation-hiding meme come from? The first federal government source from Google is http://www.bls.gov/cpi/ http://www.bls.gov/cpi/ and over there the first number is the "all items" number, then the "less food and energy" number. It's not like they're trying to hide the all-items number. And the all-items number is the number used for things like cost-of-living adjustments. If you look at a graph that shows both numbers, you see that they are on about the same level on average, just with more volatility in the all-items graph. Which is why economists like to use it for some things, they don't want the noise that comes from commodity price volatility and they want to see the "sticky" prices that show the direction where the inertia of inflation is headed. Graph: http://www.investing.com/analysis/is-us-inflation-headed-higher-210303 http://www.investing.com/analysis/is-us-inflation-headed-hig... Further explanation: http://krugman.blogs.nytimes.com/2013/04/30/still-coring-after-all-these-years/ http://krugman.blogs.nytimes.com/2013/04/30/still-coring-aft...