The tax break and branding make sense, but EBITDA seems like such a poor metric for valuation it's hard to understand why it's taken seriously. I'm guessing that point in the article was emphasized more by Money mag than by Buffet.
Why? Its got stacks of research & history behind it so you'll have to provide something a bit more substantial than "it's hard to understand why it's taken seriously".
In fact I'm struggling to see anything of substance in that post.
I mean it's a question of degrees. Were the pre-1972 adjustments in the core CPI fraud ? No, not really. Then with oil you start to have this nagging feeling, and what they did last year ... well sorry to say, but that's cheating. That's fraud, no question about it.
And EBITDA, sure. People used to use profit, for 50+ years. Then EBITDA. Why ? Because if you loan money for paying dividends or doing share buybacks profit will drop like a stone, EBITDA will be unaffected. But hell, if they had stopped there, that would have been reasonable. But they started cheating. Then came GAAP. This was modified 10 times over the last 2 decades or so, never to the advantage of investors of course, every single time it was to make companies look better than they did. And now most companies report non-GAAP EBITDA ... Differences are such things as that in non-GAAP future obligations (like a loan that's payment-free for a year) doesn't get counted until the payments start. Non-money agreements (e.g. we're going to build machines for X, they already paid 40% of the price, but we will only start delivery next quarter), the 40% is counted, the future obligation is not.
I mean again there is a spectrum here. Profit vs EBITDA ... probably not fraud. GAAP "adjustments" ... I think we can all agree that this is very dangerous territory. Non-GAAP reporting, for me at least that crosses the line.
As for the issues with GAAP, I can't understand why the holes in off-balance-sheet accounting haven't been closed given the number of disasters that have occurred. Government accounting, of course, is basically indistinguishable from bald-faced lying.
It's only half of the strategy. ZIRP is the other half. Not only is inflation being under-reported, the savings that "the old people" have can't keep up with inflation because the Fed is artificially holding interest rates at zero.
Its simply not intended for use as a "type" of profit number in its raw form...its an input for a valuation technique. The valuation technique factors in things like you loaning money for dividends as a further input (if you're doing it right anyway)
As for the GAAP issue - thankfully I operate on IFRS turf which seems to have less scary stuff than US GAAP from what I can tell.
But if you do that, most companies come out wildly negative. I wonder if that has something to do with it.
Of course there are thousand different loan types and various obligations companies may have that make this a subtle and very involved calculation. But it's certainly not impossible to value them, just hard. And ever since this was provided as an accepted loophole, I hope you can agree with me that it's been exploited a LOT by lots of companies.
If you look at a graph that shows both numbers, you see that they are on about the same level on average, just with more volatility in the all-items graph. Which is why economists like to use it for some things, they don't want the noise that comes from commodity price volatility and they want to see the "sticky" prices that show the direction where the inertia of inflation is headed.
Graph: http://www.investing.com/analysis/is-us-inflation-headed-hig...
Further explanation: http://krugman.blogs.nytimes.com/2013/04/30/still-coring-aft...
if you're evaluating a business and they tout ebitda as the only thing you should care about, you should look at net income in relation to it. for example, a mountain of debt or stupid financing terms would lead to high, maybe unsustainable, interest charges and ebitda would obscure the businesses' true circumstances. otherwise, it's reasonable to consider ebitda.