Warren Buffett Does Not Believe In EBITDA. Here’s Why
EBITDA is highly discredited as a source figure on which to base company valuations. There is too much of objectivity involved and EBIT / EBITDA are easily manipulated.
This article from ValueWalk looks at why Warren Buffet doesn’t believe in EBITDA as an indication of … anything, really.
The primary reason cash flow metrics like EBITDA or net income plus depreciation and amortization (D&A) are not fully reflective of a company’s cash flow is because they leave out two recurring cash flow changes that most companies experience every year: capital expenditures and changes in working capital. In other words, EBITDA overstates a company’s cash flow by not taking a charge for CAPEX and working capital while the other common method of simply adding depreciation back to net income also is inaccurate – adding back depreciation without any adjustment for a recurring capital expenditure paints the false picture of a company that does not need to spend any CAPEX to maintain its competitive position or unit volume. It’s not a realistic picture. Why Warren Buffett Does Not Believe In EBITDA