Take Heed of Financial Metrics with Lots of Letters in Them

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric that is commonly used to describe the “cash-generating ability” of a company. The metric has become ubiquitous as a proxy for analyzing free cash flow and is very popular in some circles.

But Warren Buffett has a strong feeling about EBITDA – he hates it. He argues that looking at a company’s profit before taxes, interest, and depreciation are taken out is dangerous because these are real costs to the business, whether they are actually cash or not. Buffett’s business partner Charlie Munger agrees.

If the Oracle of Omaha hates a metric, you should take note.

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Finance