EBITDA isn't everything: Why does Buffett ignore it, but investors need to know?

When Warren Buffett Talks About EBITDA

Warren Buffett, the investment guru, raises a major question about the financial metric EBITDA. Simply put, his criticism is: this number doesn’t truly tell the story of a company at all.

But why do many investment institutions still scrutinize EBITDA so closely? The answer lies in understanding what it tries to tell us and the main reasons behind its use.

What is EBITDA: Meaning and Context

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortization, which literally translates to “Profit Before Interest, Taxes, Depreciation, and Amortization.”

In practice, EBITDA is a way of managing figures to show “cash generated by the core operations” of a business, without involving financial policies, taxes, or the assets in use.

Companies that often emphasize EBITDA include Tesla, SEA Group, and various startups experiencing rapid growth. Why is this? Because these businesses are still incurring losses at the Net Income level, but their EBITDA looks impressive.

How to Calculate EBITDA: From Formula to Actual Figures

There are two basic methods:

Method 1: EBITDA = Profit Before Tax + Interest + Depreciation + Amortization

Method 2: EBITDA = EBIT + Depreciation + Amortization

Calculation example: Thai President Foods (Year 2020)

Using financial statement data:

• Profit Before Tax: 5,997,820,107 THB
• Financial Expenses: 2,831,397 THB
• Depreciation: 1,207,201,652 THB
• Amortization: 8,860,374 THB

Calculation: EBITDA = 5,997,820,107 + 2,831,397 + 1,207,201,652 + 8,860,374 = 7,216,713,530 THB

This figure is much higher than Net Income because it doesn’t deduct expenses that may signal weak capital management.

Where to Find EBITDA in Financial Statements: Which Part?

Most companies do not explicitly list EBITDA in their regular financial statements, but some, like MINOR INTERNATIONAL, do include it in their annual reports.

If you don’t see it in the report, don’t worry. You can calculate it yourself from the basic figures available in the financial statements.

Using EBITDA for Investment Decisions

EBITDA is useful in specific contexts:

When EBITDA is useful:

• Comparing companies within the same industry
• Assessing debt-paying ability (the higher, the better)
• Gauging operational strength in the short term (1-2 years)

Limitations:

• Not suitable for long-term analysis
• Ignores liquidity issues (Liquidity)
• Can be manipulated to look better than reality

EBITDA Margin: How Good Is the Number?

Formula: EBITDA Margin = (EBITDA / Total Revenue) × 100

Good standard: Over 10% is considered sufficient. The higher, the better, indicating efficient management and lower risk.

EBITDA vs Operating Income: What’s the Deeper Difference?

Main difference: EBITDA is like “subtracting some debt” to present a better picture, while Operating Income is more accurate and grounded.

Warnings Investors Must Know

1. EBITDA can be manipulated

Adding back depreciation can be a tool to make numbers look better. Some companies use this to craft a more favorable presentation.

2. Hidden underlying problems

A company might have mounting debt or increasing expenses, but EBITDA remains high, leading investors to overlook warning signs.

3. Doesn’t truly reflect liquidity

Since EBITDA excludes items like interest, taxes, and other expenses, it doesn’t indicate how much cash the company actually has. This is what Warren Buffett is most unhappy about.

Summary: How Should EBITDA Be Used

EBITDA is a useful tool but not the whole truth

Use it as a supplementary indicator when comparing companies within the same industry or for short-term analysis. But don’t rely on it too heavily.

Smart investors (and legendary investors like Warren Buffett) will look at EBITDA alongside Cash Flow, Net Income, and other factors before making decisions. Because ultimately, the real cash is what matters most.