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Re: EBITDA [was Re: Interconnects]

  • From: Chris Woodfield
  • Date: Mon May 20 12:14:03 2002

The main fallacy of EBITDA is that a lot of people confuse EBIDTA figures with cash 
flow figures. While the utility of a quarterly figure showing cash flow P&L, 
stripping off all noncash transactions, would be substantial, most companies 
prefer to quote EBIDTA instead, which, while disregarding all noncash figures, also 
removes interest and taxes as well, both of which are very much recurring cash 
expenditures and should be included in cash-flow P&L figures. In the absence of a 
cash-flow P/L figure, a lot of people look at EBITDA instead and forget about the 
very real cash expenditures involved with interest and taxes (and often other case 
expenditures that the company chooses to throw out in order to make the number look 
better).

Intermedia, for example, was EBITDA positive for all of the time I was working for 
them, yet was bleeding approx. $100 million plus in interest payments per year. 
This created a very real cash crunch that prompted the sale to Worldcom.

-C

On Sat, May 18, 2002 at 06:09:56PM -0700, Steve Gibbard wrote:
> 
> On Sat, 18 May 2002, Mike Leber wrote:
> 
> > press releases regarding their other choices, or perhaps considering
> > whether the companies they consider alternatives are EBITDA postive
> > (making a profit, or in otherwords will exist in 12 months) today (not in
> > an imaginary planned future) or for the few that are EBITDA positive,
> > whether they actually seem to want your business.
> 
> "EBITDA positive" does not mean profitable, or even necessarily
> financially stable.  EBITDA is earnings before interest, taxes,
> depreciation, and amoritization -- all things that tend to have an impact
> on your finances.  If you were using EBITDA as the measure of your
> personal financial situation, you could spend far more than your after tax
> income, but less than your before tax income, and declare yourself to have
> come out ahead.  Your bank, however, probably wouldn't see it that way.  
> The same goes for corporate finance, except that the corporations that
> were announcing their EBITDA numbers as the important financial data often
> had enough in the bank, and enough market cap, that it didn't become a
> critical problem for a few years.
> 
> My understanding is that EBITDA does have legitimate accounting uses, but
> I'm not clear on what they are.
> 
> I'm tempted to label this message as off-topic nitpicking, but given that
> the biggest problem with Internet stability at the moment seems to be
> financial, I'm not sure it is.
> 
> -Steve
> 
> --------------------------------------------------------------------------------
> Steve Gibbard				[email protected]	
> 

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