An old cruise ship will no longer be able to attract customers. and at some point. its very seaworthiness would come into question. away depreciation as a non-cash expense; if a new cruise ship isn’t purchas in a timely manner. the business could cease to function. There are many such industries where depreciation is not just an accounting consideration but rather a very real expense that comes with tangible consequences if ignor for long. Fam investor Warren Buffett highlight this point in his 2000 shareholder letter: “References to EBITDA make us shudder — does management think the tooth fairy pays for capital expenditures? We’re very suspicious of accounting methodology that is vague or unclear. since too often that means management wishes to hide something.
An investor probably shouldn't just hand wave
There can be cases where depreciation asia email list is a non-cash expense that isn’t necessarily recurring. Think of something like real estate. where a building is often written down significantly due to aging. even though the value of the underlying land and structure can retain its value and perhaps appreciate. That said. in highly capital intensive industries where assets wear out quickly. one should use extra caution before trusting an EBITDA valuation ratio entirely in place of earnings. Another pitfall can come with companies that have a financial element. not generally be evaluat via EBITDA or EV/EBITDA. as the addback of interest expense would skew the true profitability picture.
As mention above banks should
Paying interest is a core part of their BY Lists business model in terms of attracting deposits to fund the bank. Recently. some FinTech companies report adjust EBITDA metrics to investors in lieu of profits. This was eyebrow-raising. since these firms often were. in fact. paying sizable sums of interest to attract capital to fund their underlying operations as part of the business model. It arguably makes little sense to exclude interest from profitability calculations in such a case. Bottom Line EV/EBITDA can be a useful metric. However. it’s just one tool in a financial toolbox. and it’s one that has gotten quite popular in recent years. That has allow some analysts to stretch its uses well beyond its original aim.
