Why Charlie Munger HATED EBITDA

[@BrianFeroldiYT]

Thanks for watching! Grab a free PDF copy of Bufett's Financial Rules of thumb here: longtermmindset.co/buffett

[@RobinKeck-i2b]

And spell Buffett correctly please.

[@robkennedy5906]

Also, EBITDA does not consider working capital requirements. A company can make lots of earnings but be illiquid as they do not have the cash required to operate.

[@BrianFeroldiYT]

Good point

[@girish-d9p]

That's the reason u always look at the cash flow statement

[@brians1225]

thats why EBITDA is just a proxy for operating cash and you layer in working capital after to adjust for free cash flow....

[@ApriliaCollector]

Correct! Most commen made fault in Entrepeneurship, under estimating the cashflow, ending up in more debt…😊

[@Not-chris-8857]

@@robkennedy5906 Are you looking for one magic number that does everything? Maybe your expectations the issue.

[@davidreichert9392]

I first learned about EBITDA when the CEO of my company used it in a presentation. For the life of me I couldn't understand why people would want a number that ignores expenses. Seemed to me like a dodgy way to overstate profits. Turns out my instinct was right.

[@BrianFeroldiYT]

Yet sooo many companies still use it

[@thenoodlebuddy]

Yeah it's just a way for highly leveraged and risky companies to make themselves look like they're doing well. Then they start using adjusted ebitda for those companies that are struggling to even make ebitda look good!

[@aisolutionsindia7138]

it actually makes sense because depreciation is not a cash expense, it is generally not normalized to market cap but enterprise value.. enterprise value is like what market cap would have been in the absence of debt and cash.. however, in the long term cash flows converge to nopat, and eventually, cash flow is the king

[@timothyharshaw2347]

It's not that much different from when any lender or Landlord asks and only cares about your Gross; not your net after deductions/expenses

[@brians1225]

It also gives you a general proxy for operating cash by removing non cash

[@vincentf.2317]

Actually, I knew that EBITDA is widely used, and that both Buffett and Munger disliked it, always wondered why. Thanks for the clarification!!

[@BrianFeroldiYT]

Glad it was useful!

[@DavidBoothroyd-e9o]

EBITDA may be hated for certain reasons. However, it can be very important in some situations. In some cases in Europe, you can only claim tax deductions on interest of 30% of EBITDA. This stops people financing a company with high intra-group loans claiming high tax deductions on interest. When buying a private company, you want to see what the EBITDA is so you can see how profitable a company may be without interest and taxes which can be different depending on who the owners are. So be careful before you think that Charlie and Warren are always correct in every situation.

[@BrianFeroldiYT]

Sure. This video is meant to be more of an overview.

[@RayRose-wp4is]

EBITDA is a Revenue metric. Key point noted: A portion of interest payments may be claimed as a tax deduction.

[@zackn8745]

It's not a true metric of profitably though, because if the company is not investing sufficiently in fixed assets and many of their existing assets are near the end of their lifespan, people looking at EBITDA won't realize that the profitably LOOKS good for the short term but is going to decrease when those fixed assets do eventually need to be replaced.

[@alphaofalphas8121]

Excellent point! Every nation has different tax laws. EBITDA can help with performing a fair analysis. Then again, if the business is a possible acquisition, who wants a business situated in a high tax nation. Either way, the true net still has to look good, that's the entire purpose of business. Net.

[@sjd7188]

Exactly how much cash is a company kicking off from operations. Debt financing etc will be different with different ownership… generally when I’ve seen it used the company is preparing to sell….

[@HudsonLighting]

I recently learned about EBITDAC - essentially removing the impacts of Covid

[@randrothify]

I agree with Munger. Yes, EBITDA allows you to compare companies with different capital structures, but it does so without accounting for the fact that different businesses have different capital expenditures and working capital needs. EBITDA is a terrible metric for companies that constantly have to reinvest in plant and equipment or R&D just to keep their businesses competitive.

[@BrianFeroldiYT]

I think Munger’s logic is sound

[@RayRose-wp4is]

@@BrianFeroldiYT straight to the point.

[@colbyallen5750]

Agreed. I value financial service companies and EBITDA is the standard because there is no need for physical assets, and 95% of company sales are assets sales and translate to amortization as a capital expense. I.e. in 95% of company sales the capital structure is being recapitalized completely.

[@MillsOn2Wheels]

This is why EBITDA is not looked at in a vacuum. You would do a quality of earnings analysis focused on EBITDA in addition to working capital analysis and debt and debt like analysis to get a more full picture

[@bacchuslax7967]

Specifically says it does NOT complain with generally accepted accounting principles. Yet people go straight to it. Might as well say we’re hiding the debt but it’s still profitable

[@kumark214]

Evitda means nothing without cash flow statement.

[@Not-chris-8857]

@@bacchuslax7967 The purpose of EBITDA is understanding what a business would like like with no debt. This is important if your goal is to buy a company. Generally when you buy a company it’s debt free and cash free. The buyer designs the new financial structure.

[@osunaedgar]

Well explained..! IMHO the background music becomes a nuisance after a while...

[@BrianFeroldiYT]

Thanks for the feedback

[@harshadsubhash]

I second that.

[@rolandfisher]

agreed

[@johnwasilenko170]

Great summary of why Wall St sell side uses EBITDA for specific industry stock price valuation and targets while long term investors should be quite skeptical of this ploy

[@BrianFeroldiYT]

Thanks for watching

[@kumark214]

I doubt wall street uses ebitda for valuation. It’s one metric. But valuation is generally done using dcf.

[@Yuval_MN]

You mentioned that one adventage for EBITDA is ignoring the interest (05:20), but EBIT ignores the interest too. I could have made this comparison by simply using EBIT

[@BrianFeroldiYT]

Fair point

[@maxx0422]

EBITDA is just a margin which should go along with other margins like EBIT, Net Profit or even Added Value in any analysis, as well as cash flow. Each of them returns different information to an analyst, which must be read in combination with each other. In addition, the point of view may be different between a shareholder or a potential equity funder and a lender

[@BrianFeroldiYT]

Sure. Good color

[@sngs9565]

Very clear and concise information...Thank you, Sir....🙏🙏🙏

[@BrianFeroldiYT]

Most welcome

[@mikebaxter247]

Motivation is key to understanding, banks like EBITDA so they can lend you more, they also use financial covenants to manage debt loads. As a rule of thumb, it youre doing well with net income youre growing your bank account!

[@richardgordon]

Really love videos like this! Interesting, informative and clearly explained 😊

[@BrianFeroldiYT]

Glad you enjoyed it!

[@johnthelen2696]

EBITDA reminds me of Lion King when Rafiki whacks Simba on the head. When Simba protests, Rafiki states “What does it matter? It is in the past!”

[@BrianFeroldiYT]

Loo

[@bryanwoods5709]

Absolutely great overview of EBITDA

[@BrianFeroldiYT]

Thanks for watching

[@parmsingh9773]

I’ve heard a lot of companies are starting to use EBIT( earnings before interest and taxes). Especially PE companies looking to acquire small businesses.

[@BrianFeroldiYT]

That makes more sense to me. Still far from my favorite profit metric.

[@kumark214]

Not a great metric. Never gives you info on working capital and cash flows

[@MaksimSSM]

Good explanation 👍

[@djfghwetrysdfg]

earnings and free cash flow are better then?

[@MagnusAnand]

Fantastic video

[@BrianFeroldiYT]

Thanks! 😃

[@john44444]

Awesome video, thanks for the upload!

[@BrianFeroldiYT]

Glad you enjoyed it!

[@mahmoudghoneim8004]

Both measures are useful in my opinion because every business has two legs one is operational and the other is financial, as a long term investor you should check each separately before taking a decision.

[@raedaljowdah9364]

Excellent explanation. Deserved a 10x likes. A bit too fast for a subject that makes you think while you talk. I would've loved to see more on the worked out example. Pls do the same for key financial ratios.

[@BrianFeroldiYT]

Thanks for the feedback!

[@m_c_8656]

Wut he like den? Do he go wit operational cash flow, free cash flow ?

[@jeffreypritchard6102]

Naturally, companies that have lots of debt LOVE EBITDA...lol. Who wouldn't? "If you take out all the bad stuff, our company looks pretty solid."

[@BrianFeroldiYT]

Lol

[@BonnieSKC]

Love it. Thanks from HK.

[@BrianFeroldiYT]

Our pleasure!

[@bonsai4322]

Hey, Brian, can you do a video on why you have Cloudflair on a short leash? Appreciate you.

[@BrianFeroldiYT]

I think you mean that for Brian Stoffel

[@othmanelaoufir3927]

Great reminder from Corporate Finance 201 EBITDA provides short-term valuation overestimating cash available for dividends distribution, thus neglecting long-term sight consisting on making room for cash expenditures directed towards assets renewal in the future EBIT is more realistic concerning actual cash balance providing a most conservative calculation of profitability

[@jjcooney9758]

Always agreed with him. Good principles

[@illfunk1967]

Great breakdown 👏🏽👏🏽👏🏽

[@BrianFeroldiYT]

Thanks for watching

[@luigifranceschi2350]

EBITDA is not to be used to assess profitability, but capacity to repay loans and make further investments.

[@MH_Bikes]

Charlie was 100% correct, it's a waste of time. Why not have IBCOGS? Income Before Cost Of Goods Sold

[@BrianFeroldiYT]

lol. Wall Street would love that one.

[@davidjimenez1670]

Best Finance video I have ever seen

[@BrianFeroldiYT]

Wow! Thanks for the huge compliment

[@snowysadventures3698]

Unless you’re a company selling umbrellas or ice cream, EBITDA doesn’t make much sense anymore as a rough measure of “cash profit”. Better off going straight to the cash flow statement.

[@YashKapta]

this was good

[@BrianFeroldiYT]

:)

[@cassbielski4325]

Aren’t owner earnings a lot like EBITDA?

[@BrianFeroldiYT]

No - owners earnings are effectively the amount of capital that be pulled out of a business without harming it. It’s a much harder number to achieve than EBITDA.

[@cassbielski4325]

@@BrianFeroldiYT Thanks. I guess then, if you are asking for ideas, a similar explanation and example of owner earnings, perhaps contrasting with EBITDA, would be fun. Regardless, thanks for all your efforts.

[@muhammedrahilck4651]

Ever heard something like cash flow statement Nobody value a company based on its EBITDA

[@BrianFeroldiYT]

Umm….. have you ever heard of private equity?

[@kevinfrommheaven]

very interesting

[@bossntetainment]

The definition for depreciation you used is really wrong. You should not teach this if you define inflation the way you did… it is a reduction in the value of an asset over time, due in particular to wear and tear.

[@aravin11]

What he has used is correct. Slowly the interpretation changed to what you are mentioning. But both are still the same.

[@sonofsarek]

Financing through debt shouldn’t be taken lightly. Far too many companies do this.

[@BrianFeroldiYT]

Agreed

[@jose91807]

Depends on the business but debt is cheaper than equity. if you have a business that has a constant cashflow it's better for them. The M&M research shows that really well

[@azulsimmons1040]

Interesting history lesson.

[@BrianFeroldiYT]

Glad you enjoyed it

[@Delosian]

If you depreciate an asset and then sell it for the same price you bought it for, then you have to pay tax on the price difference, so you're actually no better off. If the asset is depreciated to zero and is then stolen, you can't claim the loss of the asset against your taxable income as it was worth nothing.

[@BrianFeroldiYT]

Good color

[@mannyme2986]

Is not what you make.....is what you keep!!!!

[@BrianFeroldiYT]

Correct

[@David-nx2vm]

Your example of the two companies and how they are financed is a great illustration of why EBITDA sets off alarm bells. I retired from a company that started including EBITDA in quarterly earnings reports only after they went public and had to soothe shareholders. Of course Charlie Munger was right about EBITDA.

[@BrianFeroldiYT]

Glad to hear it was useful

[@clementgavi7290]

EBITDA means Earning Before Interest Taxes Depreciation and Amortisation. In French it is called EBE in other words Excédent Brut d’Exploitation. EBITDA refers to figures from the Income statement. It is the result that shows the real operating efficiency. In accounting terms only accounts of classes 6 and 7 are concerned.

[@szymonc8739]

Yeah well if you’re pure minority stock investor then yes, EBITDA does give you much insights as you’re probably more into net income (dividends) and free cash flow (whether company has enough resources to grow). But let’s be honest, if you’re buying companies out then you look at EBITDA because you don’t give a shit about capital structure or tax costs. You want to see how strong earnings the business can generate which tells you a lot about its performance

[@BrianFeroldiYT]

Lol

[@MuphoShana]

Loans are not intangible assets,,,,,

[@BrianFeroldiYT]

Correct - but they are amortized

[@johnbatson8779]

There is no correlation between EBITDA and a company’s free cash flow. Which is all that really matters

[@BrianFeroldiYT]

Not a direct one anyway

[@johnbatson8779]

@@BrianFeroldiYT maybe an inverse correlation, every company with a high EBITDA and low cash is destined for the financial toilet

[@JD-im4wu]

...yet u still see "CFA"s who base all their valuation on EBITDA on youtube for years posing as stock analysts "for" investors. tsk tsk Cameron

[@BrianFeroldiYT]

Yup….

[@summerbreeze5115]

😢

[@jvh58]

Nothing wrong with ebitda, you just need to account for average replacement investements. Which isnt necessarily equal to depreciation. But I agree that basing valuations solely on ebitda is dishonest, especially for capital heavy companies.

[@icecream6256]

Hello, a university student in investment club here. Yeah, EBITDA is used a lot, and seeing it as non GAAP, i asked my seniors who replied with differrent capital structure businesses, especially new companies that has bought a lot of equipments which incurs a lot of depreciation. I always use the P/E valuation to track a company, not EV/EBITDA as im unfamiliar with it

[@JD-im4wu]

@@icecream6256 yes p/e def better then ebitda nonsense. but p/e is also very manipulated its the free cashflows where the magic really seems to happen

[@davidsantos6048]

remove the song behind pls

[@BrianFeroldiYT]

Good feedback

[@davidsantos6048]

@@BrianFeroldiYT or decrease the volume :) thanks

[@rholalbi8155]

Stfv & leave thanks

[@olivier9946]

Let’s be honest here and Munger or this video could make you think that EBITDA is the sole metric we are using… Not at all, it is one of them and we can be pretty sure that BH did/do use EBITDA in their evaluation. If it was that simple we would be all rich… or poor Munger was also a real BS’ter too. Whenever I hear about Warren and Charlie, I think of the two old farts of the Muppet show sitting at their balcony laughing at their own jokes 😂 RIP Charlie, EBITDA is still used!

[@surjadharma3518]

Different background between Malone and Buffet. I do not think comparable

[@BrianFeroldiYT]

Sure.

[@patusoro4781]

I would like to help the company I work for, allowing them to pay me 10 years up front... then they can amortize it lowering expense and make huge profits. Win-Win!

[@BrianFeroldiYT]

lol - yup! This is a great reason why including operating leases as debt makes no sense to me

[@JohannGambolputty22]

EBITDA…Sounds like a “brand” of knock-off toasters on Amazon. With 4.5 stars of course.

[@BrianFeroldiYT]

Lol

[@sergesantos8897]

EBITDA is used as a proxy for the annual operating cashflow. That's why EBITDA has been used since the dawn of time

[@username7763]

That might explain depreciation and amortization, but doesn't explain excluding interest expense and taxes.

[@BrianFeroldiYT]

EBITDA was invented in the 1970s by John Malone.

[@OnurcanYigit-tg1sk]

Ebitda is a great metric to make apples to apples comparison. That being said it is not bullet-proof. Asset heavy businesses (like Telecom) is not suitable for Ebitda valuations given high Depreciation charges. Ebitda alone does not factor in the full cashflow generation power of a company. A company can be highly profitable on Ebitda basis but working capital and capex requirements can wipe out all the operating cash (if not more), reverse is also applicable. Thats why there is no single multiple for all types of businesses. Financial analysts (bankers) factor in all these moving parts to make sense of the valuation multiple based on Ebitda. Nevertheless it is a great metric to compare similar businesses in the same industries and should shed a lot of light on operating performance of the company.

[@BrianFeroldiYT]

Good color

[@scorpiusroja11]

😂😂 last owners of my company from Harvard said this about every day

[@BrianFeroldiYT]

:)

[@marcinekpomaranski]

I thought I was the last one to see a scam in Ebitda :))))

[@yashagar4443]

Depreciation and amortization are cash expenses

[@BrianFeroldiYT]

Incorrect. They are cash expenses at the time of purchase, reflected on the cash flow statement. However, they are non-cash expenses on the income statement.

[@Tuberis]

Very nice. I would skip the music and slow down the pace of speech if I were you.

[@BrianFeroldiYT]

Thanks for the feedback

[@elcastorgrande]

EBITDA is a great way toi disguise overleveraging.

[@BrianFeroldiYT]

Yup

[@mike_valueinv]

Charlie Munger criticizes EBITDA for ignoring crucial costs like depreciation and interest, which can mislead investors into thinking a company is more profitable than it really is. He prefers metrics that reflect true, long-term value.

[@BrianFeroldiYT]

100%

[@mike_valueinv]

@BrianFeroldiYT thank you for the support!

[@sutats]

Speculate to accumulate!

[@koonsickgreen6272]

Proxy for cashflow. Fast dirty ballpark at cash generation/burning. No one uses it alone. You want real cashlfow you looks at the cashflow statement and knit pit. Ignoring ebitda is about sane as ignoring operation profits/losses

[@George-ni5ic]

Earnings Before All The Bad Stuff

[@BrianFeroldiYT]

Lol

[@Chadhogan111]

Hate these click bait thumbnails

[@jkb462]

Fell for it too

[@thenoodlebuddy]

Didn't forget about the even dodgier adjusted ebitda!

[@BrianFeroldiYT]

I was thinking about making a video about that…

[@ThisIsGoogle]

It's for Special purposes. If you have to ask it's not for you, it's a very obvious Accounting tool when you know what it's used for

[@tompuijpeNL]

Let's just all pay 40x community adjusted EBITDA ;D

[@BrianFeroldiYT]

Lol

[@petermeszaros3849]

Ebitda??? Latka says what???

[@brienchia]

Long story short...listen to the accountant, not the capitalist

[@sigungajoshua6149]

I HATE IT TOO !!!

[@rholalbi8155]

😭🤷🏿‍♂️

[@matt.stevick]

rip to a goat 📈🇺🇸

[@BrianFeroldiYT]

He was a gem

[@Doug8521]

I work in fp&a and ebitda is such a made up number

[@BrianFeroldiYT]

Sure is

[@HaziqFaiz-b4x]

T est comment from my iPad using Apple Pencil

[@BrianFeroldiYT]

Test confirmed

[@RobinKeck-i2b]

Please turn the music off and speak way more slowly. I’m not 5.

[@BrianFeroldiYT]

Feedback recieved!

[@borism4629]

In short it's a sham

[@clarkkirkpatrick]

I hate this music Great video but very distracting, repetitive, sanitary music

[@BrianFeroldiYT]

Noted

[@mvmallinson]

Music, seriously? What a distracting awful racket

[@BrianFeroldiYT]

Feedback received

[@CP-oo8mj]

So much wrong information in your video, don't know where to start...

[@summerbreeze5115]

Elaborate 🤔

[@swphilosophy3040]

​@@summerbreeze5115 The definition of amortization is inaccurate. The statement that EBIT and operating income are the same is also false.

[@CP-oo8mj]

@@summerbreeze5115statement that EBITDA doesn't include SBC

[@BrianFeroldiYT]

Constructive feedback is always appreciated

[@butwhytharum]

Never knew tax expenses weren't operating expenses. As if you don't pay and would continue to operate.

[@QqQ-h5h]

This is so good. Lol

[@BrianFeroldiYT]

:)