EBITDA Metric Losing Credibility Among Institutional Investors

Chris Gaetano
Published Date:
Oct 14, 2019

Institutional investors are increasingly frustrated with companies' reported EBITDA (earnings before interest, tax, depreciation and amortization), saying that adjustments have gotten so common that, in many cases, the EBITDA appears to be "pretty much just a made up number at this point," according to Institutional Investor. This metric is supposed to reflect a company's progress absent financing decisions, taxes, and various non-cash expenses. Institutional investors, however, have begun to grumble that this measurement is increasingly disconnected from tangible reality as more and more companies inflate the number through what Institutional Investor called questionable adjustments. For example, a private company owned by its founders often includes hefty salaries and personal expenses. But when the founders sell the company, they will often value the firm without those expenses, on the theory that when the company is run more commercially, those expenses will no longer be incurred. Businesses have also been seen increasingly counting expected credit gains from future events into the present measurement.

The number of such adjustments is high right now, as 43 percent of syndicated loan issues, frequently used to finance leveraged buy-outs, contain them. The problem seems to get worse as credit scores go lower. Of firms rated BB by S&P, adjustments are believed to have overstated income by 21 percent; of those rated only a single B, that number is believed to be as high as 50 percent. While metrics are difficult to come by for smaller firms, it is believed to be even worse on that level.

So, while companies have apparently been continually adjusting EBITDA to make themselves look more attractive, in doing so it would seem they have damaged the metric's credibility in a way that has made things more difficult for everyone.

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