Why EBITDA Is Not Useful In Valuing Companies? - Warren Buffett

EBIDTA - A company's earnings before interest, taxes, depreciation, and amortization is an accounting measure calculated using a company's earnings, before interest expenses, taxes, depreciation, and amortization are subtracted, as a proxy for a company's current operating profitability.

Why EBITDA Is Not Useful In Valuing Companies?

00:13 Buffett is against using EBITDA as he believes depreciation is the worst kind of expense a business can have.
01:00 Using EBITDA is in the interest of Wall Street to inflate valuations.
2:55 Munger Believes teaching EBIDTA in Business schools is "Horror Squared"

#Buffett #Munger #EBITDA

Value Investor's Library:

[AoDConnection]

When I was first learning about EBIT & EBITDA, my instant knee-jerk reaction was that it made absolutely no sense to ignore expenses. Sure maybe interest can be ignored if its debt they have cash in the bank to pay off or is expiring soon, but tax laws don't change very often and Buffet just explained the DA part.

[zorven]

I am a corp controller - I have always found the use of EBITDA to be of dubious value as it assumes you have no capex requirements.

[YoPaulieMusic]

I've always said EBITDA stands for Executive Bulls**t Intended To Distract Attention. :)

[pablosmitty]

I don’t believe it’s a valuation metric and shouldn’t be viewed as one. It’s actually just an operating performance metric that allows for peer to peer comparison of performance, exclusive of geography and investment structure.

[Augustheatsucks]

Im in an MBA program at a popular state UNI, and they teach it, but they teach why its bad. At least my professor does. He has the same views as Mr. Buffet.

[kinchuenyuen]

pro-EBITDA or against EBITDA must recognise it is a line in the P/L, it is not the final line in P/L. As long as any talk of EBITDA is followed with discussion of Capex and finance costs, I am fine with it.

[robertrydlewski]

I was reading the financial statement of "Aalberts", a Dutch semiconductor company. ( They produce other technologies as well )
And I looked at the annual report the IBITA is emphasized a lot. After digging into understanding what it meant, my first red flag was. "Why would you take off amortization cost? To make the price higher. That's dissection. I am glad Warren Buffett has an identical point of view.

[JR-zmnx]

It seems to me that EBITDA is a silly way to assess the value of a business from the outside. However, I see a benefit to using it internally as a way to note differences in all of the controllable aspects of the income statement - to see where a company can improve. You typically can't really control ITDA much, so your focus would be on everything else. So I guess it has a its uses. Just not for company valuation.

[tustak]

I get why Interest, Tax and Depreciation is still valid expenses .
But amortization is pretty much the same as cash. You can choose to take a new loan if you want or reduce it just as before the first loan was taken.

Can someone help me explain why Amortization is a valid expense similar to the other?

[phantomcreamer]

Why do people calculate ev/ebitda instead of ev/free cash flow

[kinchuenyuen]

Thats is to say, any confusion of EBITDA can be cleared if it is always put in the context of a proper DCF model.

[phvaessen]

Warren Buffett's owners earnings also add's amortisation, depreciation and non cash expenses to earnings? Does that mean that Warren Buffet's owners earnings is BS too ?

[shankarbalakrishnan]

When I mention about head of state everyone turns up first check your state of ur head haha❤❤🎉🎉 stats ate all wrongs

[gamespotlive]

Theory: Charlie Munger and Warren Buffet are muppets

[denysolleik]

One of them thinks the other was born the wrong gender.

[BRX]

We will miss Charlie Munger's pithy wisdom.

[swphilosophy]

I really like this video. But Buffett has changed his view on this quite violently since he came out with this one.

[abrahamgomez]

I agree the cost of capital is not factor in

[AjejeB]

Yes and No Buffet, those fixed assets have value and could be sold; your company without fixed assets that makes the same money would have no liquidation value.