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.
London N7, UK