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EBITDA-Humour or Making Fool ?

EBITDA (earnings before interest expenses, taxes, depreciation and amortization): Earnings before I tricked the dumb auditor.

EBIT (earnings before interest expenses and taxes): Earnings before irregularities and tampering.

EBITDA

"Governments Control Markets; There Is No Price Discovery Anymore"-Must Watch Video

In this 38 minute interview Lars Schall, for Matterhorn Asset Management, speaks with Dr Pippa Malmgren, a US financial advisor and policy expert based in London. Dr Malmgren has been a member of the U.S. President’s Working Group on Financial Markets (a.k.a. the “Plunge Protection Team”). They address, inter alia:

  • Malmgren’s recent book “Signals: the breakdown of the social contract and the rise of geopolitics”;
  • the “inflation vs deflation” debate
  • the closer ties between Russia and China
  • the future of the Euro
  • Germany’s gold reserves
  • and the phenomenon of “financial repression”
  • Moreover, Dr Malmgren explains what she foresees as the endgame of the financial crisis.

Manipulation of ebitda

If dropping “ebitda” into cocktail party conversation makes you feel like a globetrotting financier, there is something you should know. It makes you sound like a MBA twit-clone with a Hermès tie and two brain cells. A fuzzy proxy for cash flow, ebitda (for the uninitiated, earnings before interest, tax, depreciation and amortisation) is the unit that investors and analysts reflexively use to talk about profit. (And what else do they talk about? Property?) It can mislead – but shouldn’t be abandoned.

The elegance of ebitda is that it comes straight off the income statement, and very high up on it where it should be purest. Coming ahead of interest expense, it is capital structure agnostic, and takes out recurring non-cash charges, too. But relying on the income statement alone ignores critical uses of cash that appear elsewhere – capital spending, changes in working capital, deferred revenue. Free cash flow captures these, but requires turning to another page of the financial report and is hard to forecast as it depends on the timing of payments. But in telecoms where capex is massive, in retail where inventories oscillate, or in software where revenue recognition is key, ebitda misses too much. (more…)

Joseph Belmonte, Buffett and Beyond, 2d ed.-Book Review

buffett

In Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (Wiley, 2015) Joseph Belmonte offers investors a metric he believes is pretty close to the Holy Grail: return on equity (ROE) as configured by Clean Surplus Accounting.

The companies that investors choose for their portfolios should have a ROE that is high and consistent over time. The problem is that practically all investors calculate ROE in a way that is both inefficient and unreliable. Traditional ROE is not a useful ratio for comparing the operating efficiency of one company to that of another because, for most companies, it is inconsistent from year to year. Worse, there is almost no correlation between book value (equity) and stock returns.

Traditional ROE uses earnings to calculate the return portion of ROE. But earnings include both non-recurring items, which are not predictable, and future liabilities. As Belmonte argues, “[i]n no way do these events show how efficiently you’ve been running your operation. And we’re concerned with operating efficiency in our ROE ratio and not branches falling out of the sky because of a hurricane passing by.” (p. 59) So, for the return portion of the ROE ratio one should use net income, not earnings.

What about the equity portion of ROE? Owners’ equity (or book value) equals the common stock issuance plus all retained earnings, where these retained earnings can come only from net income minus dividends.

Based on his research, indicating that stocks with a history of high Clean Surplus ROEs outperformed the S&P 500, Belmonte came up with six simple rules for structuring a portfolio.

(more…)