EBITDAC – Good Idea or Bad Idea?

It’s very common in the business and investing world to use Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) as a metric of health and performance. In a more general sense, we could call it net income, gross income – cost of goods and operation.

I have seen several headlines and even an episode of The Indicator, a podcast, speaking about a more recent trend, EBITDAC. It’s basically the same thing, but also adds back an amount of money allegedly equal to the losses due to COVID-19. I say allegedly because nobody can necessarily know what that number is, only guestimate it. Since we’re just sort of guestimating financial numbers, why not do so in your favor yes?

I… find that prospect horrifying. It’s not entirely unfair, allowing those adjustments. I realize there are business losses far above and beyond anything we could have predicted and it’s a bit harsh to force a lot of companies into default because COVID pushed income below the level allowed in their debt agreements. This also softens the blow to the workers they employ and helps rein in things like unemployment and furloughs.

It also seems like a massive level of burying our head in the sand and denying reality. How long are they allowed to report EBITDAC? A year, two years, a decade? What happens when they stop and the numbers snap back to reality? As always, the infamous 2008 questions, what if they fudge the numbers to pick up too much debt, or the wrong kind of debt, on a large scale that’s eventually going to lead all those companies into default anyway? Could we be using this recession to set up the next one?

Of course, I am by no means an expert on corporate finance. Everything I have been taught in my formal education has focused on the importance of accuracy and ethical reporting, and this seems to fall somewhat short.

On the bright side, I don’t think it’s in widespread use. The only report I’ve looked at recently is Activision-Blizzard and I know they did not use it. With the amount of fuss it’s stirring up, maybe it’ll die out before it becomes an issue.

Worker welfare and investment risk seem to represent a hard balance to find. We really don’t want to see the widespread unemployment and losses that stem from the collapse of large companies, but if we prevent them from failing entirely, where’s the risk that’s supposed to match the reward? On that same note, most of these debt agreements were signed before COVID was on the radar. Quite plainly, that was the risk the investors and corporations took when they accepted the arrangement, knowingly or not. If we take away the consequences of that risk, what incentive remains to invest or use debt wisely?

Okay, that’s enough of that for today, I think. Y’all take care. Invest carefully, don’t put all your eggs in one basket, and keep your head out of the sand, yeah?

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