You've probably heard of EBITDA. It stands for "earnings before interest, taxes, depreciation and amortization."
Companies love to tout their EBITDA numbers. It's become a popular way for them to make their financial results look better than they really are. By excluding a whole host of normal business expenses, EBITDA presents an inflated, unrealistic view of profitability.
EBITDA is a fairy tale. It's a made-up metric that ignores economic reality.
Interest, taxes, depreciation and amortization are all real costs of doing business. Interest is the cost of borrowing money. Taxes are a required expense, unless you want to end up in jail. Depreciation accounts for wear and tear and obsolescence of assets over time. And amortization spreads out the cost of intangible assets.
Stripping all those out to get to EBITDA is like saying you ran a four-minute mile, as long as we ignore the last three laps.
It's delusional and deceptive. If you tried to run a real business without accounting for interest, taxes, depreciation and amortization, you'd quickly go bankrupt. Those expenses catch up to you.
Don't fall for the EBITDA scam. Demand to see real profits calculated with real expenses. Insist on metrics grounded in economic reality, not accounting gimmicks.
The job of a business is to make money, not to fool people with phony numbers.
