The article focuses on the prevalent use of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) as a key performance indicator by companies like Zomato. It highlights how Zomato’s shareholder letter emphasized adjusted EBITDA, which fell 15%, while neglecting the steeper 78% drop in net profit.
The article explains that while EBITDA excludes interest, taxes, depreciation, and amortization, presenting a potentially misleadingly optimistic view of profitability. It notes that while many companies use EBITDA, prominent investors like Charlie Munger and Warren Buffett have heavily criticized it, calling it a distorted measure of reality. They argue that ignoring real costs like depreciation, interest, and taxes paints an inaccurate picture of financial health.
The core argument is that true profitability is reflected in profit after tax and cash flow, not manipulated metrics. Adjusted EBITDA, according to the article, further distorts the reality by adding additional adjustments, making it even less reliable than the already questionable EBITDA.
Eternal’s (formerly Zomato) letter to its shareholders on 1 May, detailing its results for the quarter ended March, prominently featured a usual suspect: the unusual metric of adjusted Ebitda.
It fell 15% to Rs 165 crore from the same period a year ago, owing to “the impact of accelerated store expansion in quick commerce.” The stock’s reaction to this news may be bad. But what the letter left unsaid was that Eternal’s net profit for the quarter slumped by a steeper 78%. Had it been highlighted, the reaction may be worse.
For Zomato, adjusted Ebitda is the bottom line. But should the line be drawn elsewhere?
Adjusted Ebitda exemplifies what dyed-in-the-wool accountants have known for eternity. That they can, if they want, weave numbers and profits out of thin air. Accounting is the art of the possible. If cash is reality, adjusted Ebitda is magic reality.
While generally accepted accounting principles (GAAP), or the accounting rules that companies use for reporting financials, don’t recognise metrics like EbitdaEbitdaEarnings before interest, taxes, depreciation, and amortisation and adjusted Ebitda, the former is widely used to measure the operating profit of a business. It excludes the impact of debt-financing (interest), capital expenditures (depreciation and amortisation), and government dues (taxes). Many companies—from oil-to-retail behemoth Reliance Industries to consumer-products giant Hindustan Unilever—continue to publish Ebitda in their results. They’ve done it for decades.
However widely used it may be, the metric has its own critics; some of them trenchant and very famous.
“Everytime you hear Ebitda earnings, substitute it with bullshit earnings,” the late American investor and vice-chairman of investment firm Berkshire Hathaway, Charlie Munger, had said. He also termed the metric “horror squared”. Munger’s partner Warren Buffett had a similar dim view. “Does management think the tooth fairy pays for capital expenditures?” he had asked.
Their point? Depreciation, interest, and taxes are real costs for a company and not optional. Ebitda, therefore, distorts reality and gives a misleading picture of profitability. What really counts is the real bottom line: profit after tax, and the cash the business generates.
If Ebitda distorts reality, adjusted Ebitda takes the distortion notches higher.
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