Finance Thought Leadership

CEO Perspective: What does Adjusted EBITDA even mean?

CEO Perspective: What does Adjusted EBITDA even mean?

michael-johnson-ebitdac-mugLast week this mug arrived at my doorstep as a gift from our CFO – Justin Winchiu.

It reads, “EBITDAC – Earnings before interest, taxes, depreciation, amortization – and coronavirus.” Hashtag EBITDAC was trending on Instagram with 133 related posts. The accounting crowd was posting mug pics and many had LOL emojis in the comments.  A lighter moment in an otherwise serious time.

It’s hilarious to accountants, not going to lie; my partner didn’t understand it. So, I will continue with my dinner-time lecture series in the hope that by hour 40 of the basics of economics, accounting, finance, she will find the punch line funny. She did, however, think the mug would hold the perfect amount of morning coffee. And so there’s that.

What Does EBITDA Mean?

Originally, termed as EBITDA (Earnings before interest, taxes, depreciation and amortization), there are opposing views on the use of this metric for the presentation of financials. On the one hand, you have people that (whether genuine or not) will adjust their earnings numbers by various measures for various reasons. Then there are folks like Charlie Munger (Warren Buffet’s business partner) of Berkshire Hathaway, who famously says, “I think that every time you see the word EBITDA, you should substitute the word “bullshit” earnings.” Source: Forbes Article “EBITDA Is ‘BS’ Earnings”

Is EBITDA A Good Business Metric?

Personally, I think information is valuable. Yet I am cautious when I read about companies reporting their own version of adjusted earnings. Sometimes I feel concerned for the average investor who may use that number instead of main-stream accounting numbers supported through standardized accounting frameworks.

Internally, if company management wants to measure its financial performance through various metrics such as an adjusted EBITDA that information should be available to them. They should know what KPI’s are going to lead their organizations to have the most impact and ensure their own long-term success.

From the perspective of any other stakeholder (other than management), if you were to ask me where I sit in the debate, I believe in transparent reporting of financials and honesty and integrity in the accounting profession. I’m not against “EBITDA” or a form of it; however, I am in favour of not misleading financial representations for the stakeholders that rely on them for various reasons such as investing.

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