EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was coined and popularized by American media billionaire and investor John Malone in the 1970s to better assess the cash-generating ability of his capital-intensive cable companies, moving away from less relevant metrics like earnings per share (EPS) for rapidly growing businesses. He introduced it to Wall Street to show a company's true operational performance and capacity for debt, especially in industries with large upfront investments.
History of EBITDA
The cable industry pioneer came up with the metric in the 1970s to help sell lenders and investors on his leveraged growth strategy, which deployed debt and reinvested profits to minimize taxes.
History. The original concept of EBITDA was pioneered in the 1970s by billionaire investor John Malone.
EBITDA can misleadingly present unprofitable firms as financially healthy by omitting certain expenses. Critics argue that EBITDA can be manipulated, making companies appear stronger than they are. Unlike operating cash flow, EBITDA excludes changes in working capital, potentially hiding financial troubles.
Although EBITDA is widely used, it is not necessarily a legitimate measure of a company's success, and is often used as an initial guideline prior to deeper analysis. Warren Buffett has famously called EBITDA “utter nonsense”.
According to Buffett, EBITDA is not reflective of a company's true financial performance due to neglecting capital expenditures (Capex) and changes in working capital, among various other issues.
EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is a popular measure of cash flow, but it is not accurate, and bankers and investors who rely on it as a reliable indicator of repayment ability will be deeply disappointed.
Malone hasn't just been content with dominating the cable television industry. He's also taken control of vast plots of terrain. Inspired by a summer spent on a family farm in Pennsylvania, he decided to invest his multibillion dollar profits into land.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric showing a company's operating profitability by adding back non-operating expenses (Interest, Taxes) and non-cash expenses (Depreciation, Amortization) to net income, offering a clearer view of cash flow and making it easier to compare companies with different capital structures or tax situations, but it's not a perfect measure as it ignores real costs like asset wear-and-tear. Think of it as a simplified "scorecard" of core business performance before financing, taxes, and accounting entries.
How Is Business Profitability Best Measured? The gross profit margin, operating profit, and net profit margin ratios are the most commonly used measurements of business profitability. Net profit margin reflects the amount of profit a business gets from its total revenue after all expenses are accounted for.
This preference reflects his belief that understanding the core earnings power of a business is crucial for making informed investment decisions. In summary, Buffett's preference for EBIT over EBITDA is grounded in his commitment to value investing and understanding a company's true profitability.
But too often it tends to be justified with the argument that, by omitting depreciation and amortisation, EBITDA represents a better measure of profit, one that better approximates cash flow. This is nonsense. Depreciation is a very real cost. It is the cost of consuming productive capacity.
While net income is a widely recognized metric, EBITDA is preferable in industries where capital-intensive investments are the norm. EBITDA provides a clearer picture of a company's earning potential without being distorted by factors like tax policies or capital structures.
EBITDA – The primary measure of cash flow used to value mid to large-sized businesses and does not include the owner's salary as an adjustment.
A 2019 study by Harvard Business Review found either Vanguard, BlackRock or State Street is the largest listed owner of 88% of S&P 500 companies. There is a perception that a few select companies own a vast majority of the stock market.