EBITDA [was Re: Interconnects]

Sun May 19 02:12:57 UTC 2002

On Sat, 18 May 2002, Steve Gibbard wrote:
> "EBITDA positive" does not mean profitable, or even necessarily
> financially stable.  EBITDA is earnings before interest, taxes,
> depreciation, and amoritization

Correct, however I was trying to provide a simplified translation.

A company that isn't EBITDA positive can't survive by declaring bankruptcy
becausee even after they get rid of the interest payments they will still
have a negative run rate.

The reason for using EBITDA as an early indicator for financial health
when analyzing companies is that it allows you to look at the health of
the operation independent of their debt structure and prior capital
expenditures (depreciation and amortization) so that you can get a better
idea of their cash flow.  The reason why cash flow matters is because when
a company runs out of cash bankruptcy is imminent.

Profitiability from a P&L statement (expecially for public companies)
involves so many components that it frequently doesn't allow you to
evaluate a company until it has matured.

> The same goes for corporate finance, except that the corporations that
> were announcing their EBITDA numbers as the important financial data often
> had enough in the bank, and enough market cap, that it didn't become a
> critical problem for a few years.

True, however by looking at EBITDA and current assets (cash in the bank)
you can get a quick picture of the likely hood a company solving anything
by declaring bankruptcy and a rough time frame to their imminent demise.

> My understanding is that EBITDA does have legitimate accounting uses, but
> I'm not clear on what they are.

I hope you find my explanation above a useful rule of thumb.

> I'm tempted to label this message as off-topic nitpicking, but given that
> the biggest problem with Internet stability at the moment seems to be
> financial, I'm not sure it is.

Due to the fact that I've had to order redundant capacity from multiple
vendors in situations where there was enough traditional physical network
redundancy, this seems to have become an important network provisioning
issue.

Mike.

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