Warren and Charli on EBITDA

Warren Buffett on EBITDA

"We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

 

From 2002 Berkshire Hathaway Annual Report

Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?

 

Second, unintelligible footnotes usually indicate untrustworthy management. If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to. Enron’s descriptions of certain transactions still baffle me.

 

Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers).

 

Munger's words in 2017 BRK Annual Shareholders Meeting:

Munger: Ebitda Is a 'Horror'

Mr. Munger and Mr. Buffett are inveighing against the use of Ebitda in the business world, or earnings before interest, tax, depreciation and amortization. Mr. Buffett launches the first salvo, saying that excluding depreciation is ridiculous. It's a line of argument he's advanced before.

But Mr. Munger says he hasn’t gone far enough.

“You’ve understated the horrors of the subject and the disgusting nature of the people who brought that term into the valuation of business,” says Mr. Munger. “Now they use it in the business schools. That is horror squared.”