Thread by @BrentBeshore

A fellow EBITDA-curious investor sent me this from Moody's dated June 2000.

Why care?

Like it or not, EBITDA is the standard profit proxy and default valuation metric in the private markets. Expectations are always quoted in EBITDA, or adjusted EBITDA.

ucema.edu.ar/u/jd/Inversion…

Financial innovations rarely stick to the intended lane, morphing into justifications for continually more aggressive behavior.

*Insert something about fools doing so in the end and history rhyming*

"LBO sponsors and bankers have promoted the use of EBITDA for its obvious image benefits."

Ding, ding, ding, we have a winner!

"EBITDA is insensitive to the actual collection of cash because it ignores fundamental changes in working capital that are otherwise calculated when deriving net cash from operating activities...earnings cycles are completed
long before cash is realized."

Hello nuance my old friend, I've come to talk with you again.

Out of 10K+ looks, I've quite literally never seen a company like this --> "The use of EBITDA as an indicator of debt coverage implies that funds generated by non-cash charges for depreciation are not needed for reinvestment for ordinary capital expenditures."

Now amortization is a completely different story and important to understand the difference.

For acquirers, this is the money slide.

After providing us with little more than EBITDA, we often get asked to "ballpark" a valuation. That's like providing a keyhole view of the team's last play and asking someone what they'd pay for the franchise.

"EBITDA can easily be manipulated though aggressive accounting policies relating to revenue and expense recognition, asset writedowns, excessive adjustments in deriving 'adjusted pro-forma EBITDA' and by the timing of certain “ordinary course” asset sales."

In conclusion..."EBITDA is not well suited for the analysis of many industries because it ignores their unique attributes."