Can someone explain the obsession with EBITDA and not Nett P

[urquattroGus]

Much emphasis is now put on EBITDA.

I can understand that it is a way to compare businesses but in todays market with high borrowing costs and interest charges, but I still tend to see it as "not real profit"

Also can understand overlooking taxes etc

Some businesses such as car dealers have huge borrowings and interest charges to finance stock.

It is not possible to run these businesses without some level of stock and the interest costs are huge. So how is the cost of the interest not relevant. It certainly is to the Nett profit in the stat accounts at the end of the year, it's a real cost.

Powerfully Built Management Consultant Types talk about EBIITDA as real and genuine profit....

Am I missing something here?

[Uncle boshy]

It depends on the nature of the business as to how useful a measure it is.

My background is in telco, where you can have large investment costs, but not all telcos invest at the same time. Stripping out the t,d and an elements allows you to compare companies on a more like for like basis, whereas net profit can be distinctly different between firms based on investment lifecycle.

Similarly in large multinationals where component parts of the business might be in different geographies, e g brand, commodities , sales, r&d etc, it can help better understand the underlying business

That said it’s just one metric and you need to look at underlying profit and other financial ratios to get the full picture

[zbc]

I've worked with several different PE owned companies where the company takes on debt itself to effectively fund the acquisition. In this case it's not immediately obvious which debt is 'normal' company debt and what is there for the acquisition without going through at a greater level of detail. In this case stripping out the interest and depreciation (which can also do strange things in these acquisition) gives you a cleaner and more comparable view of the companies value.

[db10]

in a PE deal there is always new debt anyway so the existing interest cost is irrelevant as it will change when the new debt comes in. Depreciation is an artificial accounting concept so EBITDA gives a better approximation of what earnings/cash the company is generating

Tax is for the little people................

[Al Gorithum]

It's something that sales agents use to inflate the value of the Co's they trying to sell.

Don't fall for it.

[Jon39]

Warren Buffet's recently departed partner, Charlie Munger could not stand the misleading use of EBITDA. He suggested placing a rude word following every instance of EBITDA.

Mr. Lawrence Stroll is very keen on the use of EBITDA (b------t) for Aston Martin Global Holdings Plc. I wonder why? It is a business that after 110 years, has been bust many times, has never reported a genuine pre-tax profit and has debt of about one billion Pounds.

EBITDA is very handy for fooling providers of capital.