With any financial metric there are pluses and minuses to using them. It is essential to know how to use any metric as an evaluation tool to keep things in perspective. Attached is a great article about those perspectives regarding EBITDA. At the very least, investors should understand this pervasive metric being shoveled out by companies now days as the “golden” answer.
Read the attached article and get some perspective on EBITDA and its uses. You'll be better for it and a much more informed investor.
EBITDA’s “claim to fame” was established by leveraged buyout firms in the 1980’s to judge how much debt they could load up on a company to magnify the leveraged buyout firm’s equity returns. They would then squeeze out operating profits to pay down the debt quickly, to turn a large and quick profit, and exit “stage left”.
Debt is like the Song on the Siren. While its use can be very enticing, it can be fatal in large amounts.
The use of EBITDA is defined differently by every company. It’s like playing football with every player defining their own set of rules. Pure anarchy!
Instead of letting the analyst's make their own judgements as to value presented by a company’s performance, a lot of companies "sell" their idea to the analysts of how valuations should be done. Silly.
Be well-read, stay informed and be successful.
