The “real bottom line” in the Financial Times

The blog has had a letter published in the FT this morning, which readers might like to see.

It focuses on the problem of using EBITDA measures when analysing a company’s performance. It suggests that analysts should move away from their current reliance on this measure, which ignores the impact of important areas such as interest and tax payments. Hopefully, the letter may help to spark some debate in this critical area.

Sir, I was delighted to see Lex reminding readers that they should assess company profits after payment of all significant costs such as “staff or technology” (“Price/earnings multiples“, August 24).

Could, perhaps, Lex take this principle a stage further, and revert to its former policy of including the impact of interest, taxes, depreciation and amortisation when commenting on earnings?

The widespread use of the ebitda measure, which ignores these critical components of company performance, has fully justified the concerns of those who worried that it would simply be used as a way of expressing Earnings before the Bad Stuff. Investors, as they have found to their cost over the past two years, really do need to know how much interest and tax are being paid, and also whether sufficient money is being set aside to replace current plant.

It would be excellent if Lex would return to basing its valuable analysis on a company’s real bottom line. This would then help your readers to assess who is swimming naked, before the tide goes out.

Paul Hodges,
Chairman,
International eChem,
London N7, UK

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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One Response to The “real bottom line” in the Financial Times

  1. Paul Ray 26 August, 2010 at 7:10 am #

    I fully support the view that greater scrutiny of the different ‘bottom lines’ is well merited. However, in support of the media industries it may be a less fun world if we didn’t get regular examples of ‘naked swimmers’ and then we’d also miss out on the supply of new garments to cover them again. But then again, I suspect that even with all the ‘bottom lines’ lined up, there will still be plenty to feast upon!

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