Bryce_in_TX

Retired. BBA in accounting. After 4 years in R.O.T.C. and two years as a junior Army officer, I worked for two public companies and several private ones as an accountant. I've pursued other vocations during my work career as well, as a pharmacist tech for a number of years, and owning my own businesses.

I am a strong and fervent proponent of GAAP. It's the best system devised by man for accurately measuring a business entity's position and operating results whether the business is private, public, or non-profit. As man devises new business ideas and transactions, it can take GAAP a period of time to catch up to accurately reporting them. Nevertheless, it remains the only financial system that is sanctioned by ...More the FASB and SEC for reporting.

Here are a few quotes from Warren Buffet in regards to EBIDTA, Depreciation as as actual cost to a company, and the role of earnings to any business. I fully concur with his comments.

EBIDTA and Depreciation:

"Three suggestions for investors: First, beware of companies displaying weak accounting. If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.

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?"

EARNINGS:

"Bear in mind--this is a critical fact often ignored--that investors as a whole cannot get anything out of their businesses except what the businesses earn. Sure, you and I can sell each other stocks at higher and higher prices. Let’s say the FORTUNE 500 was just one business and that the people in this room each owned a piece of it. In that case, we could sit here and sell each other pieces at ever-ascending prices. You personally might outsmart the next fellow by buying low and selling high. But no money would leave the game when that happened: You’d simply take out what he put in. Meanwhile, the experience of the group wouldn’t have been affected a whit, because its fate would still be tied to profits. The absolute most that the owners of a business, in aggregate, can get out of it in the end--between now and Judgment Day--is what that business earns over time."