Your Lex note “Musk’s X is a lesson in ebitdas and ebitdon’ts” (March 20) reminds us that “accounting isn’t real life”, especially when focusing on ebitda. While this metric can simplify comparisons across companies, it often glosses over everyday financial realities such as interest payments and recurring investments. In other words, ebitda does not always reflect actual money leaving (or entering) a business.
My concern is that we might put too much weight on “adjusted” ebitda figures if we’re not aware of the many costs (like stock-based compensation) that vanish from view. This can paint a rosy portrait of a company’s health when, in fact, significant expenses are simply left out of the story.
For private companies, the temptation to present higher “wildly adjusted” figures is even greater, given the reduced public scrutiny. Anyone looking at any business touting a flashy ebitda number would be wise to ask: “What does this figure leave out?”
Only by examining free cash flow and net income over time will we see the genuine impact of all those day-to-day costs that ebitda conveniently ignores.
Martin Mulyadi
Professor of Accounting, Shenandoah University School of Business,
Winchester, VA, US
