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Munger: EBITDA = Horror Squared!


EITDA = Earnings Before Interest Taxes Depreciation and Amortization, and it lets companies add expenses from interest, tax, depreciation, and amortization back onto net income.

Companies can easily manipulate the number, as WorldCom famously did to hide $3.8 billion back in the early aughts. Buffett, in particular, has attacked EBITDA for not treating the depreciation.

Munger claims "It was a bunch of investment bankers that invented it to make their trade easier. And it’s disgusting.

He continues: “And now they use it in the business schools. Now, that is, that is horror squared. I mean, it’s bad enough that a bunch of thieves start using a term. But when it gets so common that the business schools copy it, that’s not a good result.”.

“The idea that depreciation doesn’t matter? … You have to replace the trucks all the time. It’s a real cost. As Warren says, it’s the worst cost, because you pay it way in advance, and get the benefit way later,”

Makes me question -

Do Airlines companies add back depreciation to their NI?

Do REITs add back depreciation to their NI/FCF?

Do Factories add back depreciation of their PP&E back to their NI?

Food for thought, before using EBITDA in your valuations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Source: