Investment tips: Avoid companies that emphasis on EBITDA

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EBITDA stands for “earning before interest, taxes, depreciation, and amortization.” It is a financial indicator used by many companies to show their financial performance; however, it excludes depreciation and amortization.” Depreciation and amortization are also a measure of what the company is spending or needs to spend on capital expenditure to maintain or grow the business. So although EBITDA is used as a measurement of a company’s earning potential, it is somewhat misleading.


I will give you a few quotes from Warren Buffett on this point that made a lot of sense to me:

"It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.”

“We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.”

“Does management think the tooth fairy pays for capital expenditures?” 

It's actually quite simple logic. A good company would not need to try and dress up their financial statements. So those that make the extra effort to use this "alternative" indicator better have good reasons for doing so.

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