EBITDA Explained in one image
Warren Buffet and Charlie Munger famously hated the "EBITDA" method of calculating profit, because it doesn't account for allllll the really important expenses a business has like interest, taxes, depreciation, and amortization.
Adding those things into the factor can make that number very different.
Here's another similar chart from Brian Feroldi:
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Image Description
The infographic titled "EBITDA Explained Simply" by Brian Feroldi breaks down EBITDA and its components. It includes definitions and a visual flow from Sales to Retained Earnings, highlighting expenses like cost of goods sold, general expenses, depreciation, interest, and taxes.
Positive Aspects
- Clarity: The chart simplifies complex financial concepts, making it accessible even for beginners.
- Visual Flow: By showing the progression from Sales to Retained Earnings, it visually explains how EBITDA fits into the broader financial picture.
- Color Coding: Different colors are used to distinguish between types of expenses, aiding quick understanding.
Key Takeaways
- EBITDA Defined: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
- Criticism: Buffett and Munger criticize it for ignoring crucial expenses.
- Financial Flow: The chart illustrates the financial journey from revenue to retained earnings.
- Caution: EBITDA might overstate cash flow as it excludes several key expenses.
Additional Insights
- Humor: Think of EBITDA as the "rose-colored glasses" version of profit—looks good but might miss some blemishes.
- Practical Tip: Always compare EBITDA with net income to get a true sense of financial health.
- Analogy: If EBITDA were a car, it would be one without the cost of gas, insurance, and maintenance considered.
