EBITDA is Earnings Before Interest Taxes Depreciation and Amortization. It's a method of recalculating the earnings of the company to see if they have good future prospects. However, Warren Buffet himself said if you separate people who use EBITDA from those who don't, you'll find a lot more fraud in the first group. Of course, Charles Munger flatly that EBITDA was "bull**** earnings."
To give an example of the difference between standard GAAP accounting and EBITDA, if you buy a building with a mortgage and open a store your books may reflect that you have just enough sales coming in to pay all the bills. Using EBITDA, however, one of your biggest expenses of the building is ignored, how it decays with time and will eventually need repaired, and how the mortgage payment is a big monthly expense. Using EBITDA, you will appear to be rolling in dough, which simply isn't so.
Of course, EBITDA is just a means for which investors convince themselves that an investment is safer than it really is. This is where fraud comes in as well, as if the EBITDA numbers are included in an attachment to the GAAP numbers, then management are clearly trying to convince investors that the company is safer than it is, which is always a red flag. However, many of the companies that do this have their own proprietary methods of creative accounting when they release "adjusted earnings."
An extreme case of this was at ARK Invest with the adjusted earnings. They own exclusively cash burning companies, but the way they calculate the books they think all the companies they own are super profitable. They do things like treat R&D, marketing, and employee stock options costs as "investments." And also ignore all non-cash costs like depreciation and recognize deferred revenue from preorders. It's not clear if these guys are trying to fool themselves or their investors with these numbers, but also if you are to believe their projected earnings number, they believe they are destined to be the best-performing investment fund of all time.
Which famous investor was it that said that he ignored any investment if it seemed the other guy was trying to sell him the idea? Indeed, if someone is playing silly games with accounting numbers to convince themselves and others that you should invest... There's a chance they are lying to you. Or lying to themselves, however the case may be.
Submitted February 24, 2023 at 03:06AM by ThetaGangThroweway https://ift.tt/MUzmT28
