EBITDA - Everyone’s Favorite Metric to Love and Hate

If you have been around the business world or follow the public equity markets and invest in stocks, you have most likely heard the term “EBITDA” or seen it in an article, public filing, or textbook.

Whether you have heard it pronounced as “EEE-BID-AH” or “EH-BID-AH” or you are a distinguished finance or accounting professional and have your own special way to say it, it is an oft-used and referenced metric that confounds, explains, and downright annoys many people.

Before his passing, the great Charlie Munger was on record saying this about the polarizing metric:

“Every time you hear EBITDA, just substitute it with 'bullshit'.”

But regardless what legendary investors like Charlie Munger think about the metric, EBITDA is a metric that is very popular across investing, finance, and business circles, so it’s a good idea to understand all about it.

And Valuate is here to make sure you have that knowledge at your fingertips, so you can use it in your business acumen and repertoire.

What is EBITDA, Why is it Important, and How to Understand this Polarizing Metric

EBITDA is an acronym. It stands for “Earnings Before Interest, Taxes, and Depreciation & Amortization.”

It represents the amount of earnings that a business has left over from its revenue after accounting for its costs of revenue and majority of operating expenses (but of course, excluding the impact of cost items highlighted above - interest, taxes, depreciation, and amortization).

You may be asking - why decide to look at this metric vs. other profitability metrics that do not exclude the cost impact of important items?

Well, that is because EBITDA is a ‘quick-and-dirty,’ common proxy to arrive at a company’s cash flow by using its income statement / statement of operations.

Over time, it has been commonly used and adopted by many industry professionals, specifically those in private equity, growth equity, investment banking, and broadly in the finance world.

In the simplest of terms, EBITDA is how profitable a business is without the impact of debt expenses, interest, and non-cash expenses from depreciating and amortizable assets.

So if you are a ‘Munger-rite’ and cannot stand the metric, you should still work to understand how and why its used, because at a minimum, you’ll be empowered and intelligent to make the most of the metric in your business and investments.

So Why is it Polarizing and How to Best Use it in Practice?

Any metric that is subject to adjustments by folks that prepare / present financials or is flexible / configurable its in calculation create potential considerations.

EBITDA by its nature excludes very common (many argue, operating…) expenses to arrive at its presentation. In addition, many folks decide to exclude other expenses in the form of ‘add-backs’ to make the “adjusted EBITDA” look even more profitable on a subject company.

If you want a laugh and a perfect explanation of the caution behind EBITDA and the abuse that even public companies put out, look at the sad tale of WeWork in their public filings, especially from their early S-1 / IPO filings here.

Because it is not a metric subject to GAAP principles and accounting, it is largely ‘unregulated’ in its presentation, so companies can leave a lot up for interpretation and judgment, as long as they footnote and explain it...

Regardless of all of these considerations, it is a very useful, practical way to arrive at a proxy for cash earnings from a company’s income statement. This helps banks finance loans and debt for companies, creates visibility into a company’s operating earnings without the burdens of interest and taxes and capital activities, and can show how strong (or weak) a company is in its fundamental earnings power.

Enterprise value-to-EBITDA multiples are common in valuation too, so having a baseline understanding of this metric helps you interpret how good (or bad) a potential investment is in comparison to benchmarks and peers.

Valuate is Here for All You EBITDA Lovers and Haters

Whether you are an aficionado of EBITDA (there’s a nice t-shirt idea…) or you loathe every letter of the acronym and what it stands for, Valuate is here for you all.

Our platform (currently on an iOS beta with the web app soon to come 😀 ) is built to give you sleek and simple visualizations on your metrics and data against common benchmarks, provides you insight on how to understand and apply these metrics across your business actions, and how to carry out tasks to deliver value to your organization.

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