A simple way to reason about EBITDA, is raw earnings before tax and accounting specialists come in and do financial engineering. Typically accountants will do some magic to earnings by using ITDA, so this gives a bit more of a uniform earnings picture across businesses.
Another way to reason about it is "earnings before bad stuff." Your explanation makes it sound like it is a superior measure by painting the other GAAP measures as "financial engineering." EBITDA is vastly inferior, although it has some uses in comparisons and also glossing over bad news.
Examples: I take a loan with 1 million a month in interest payments and I "invest it" and "earn" 1 million a month. EBITDA: 1 million a month. Amazing! Real world, net zero.
I buy a 20 million dollar piece of equipment that lasts 20 years. From it, I "earn" a million a year. EBITDA: great! Real world, net zero.
Each financial metric tells a story. They each tell different stories so it is not a case of one being more important than the other. EBITDA is a way to compare similar companies that may have different capital structures. So it allows a side-by-side comparison of the core business.
For instance, Companies A and B are competitors in the same market and both have a million dollars in annual revenue and earnings of $100K. Are they both worth the same? What if I told you that Company A has no debt, and is depreciating its assets at an accelerated rate (ie is "paying off" its capital investments rapidly) while Company B is loaded up with massive debt and is depreciating more slowly? That changes the picture a little bit, doesn't it? This is why you have different metrics. Think of them as clues in a detective story rather than horses in a race.
So we agree about that. In terms of EBITDA's "other uses" your example proves my point? From an EBITDA perspective, those companies look the same, so if you want to paint a rosy picture and you're the company with lousy financials, EBITDA is your go-to metric for your talking points.
I disagree it can be indicative of the real world. It is if I’m buying it from you. If I’m buying the business id like to understand the cash flow I could expect. I’m not necessarily going to have that loan with interest or the same taxes so it makes sense to pull it out and have an earnings only metric
