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Whether your company is publicly traded or whether you invest in the stock market yourself, you've probably noticed that EBITDA has been in the spotlight lately.
Most people define EBITDA as "earnings before interest, taxes, depreciation, and amortization." However, a disgruntled shareholder of a former high-flying stock that lost 90 percent of its value recently came up with a new definition: "executives boosting investors' true definition of accomplishment."
It's clear that EBITDA has deficiencies as a metric for performance and falls far short as a measure of a company's wealth. Consider WorldCom. The telecom company reported stellar EBITDA numbers, but it had virtually no free cash flow (i.e., cash flow from operations minus capital expenditures).
WorldCom seemed profitable from an EBITDA perspective, but closer examination revealed that the telecom carrier still needed to borrow or raise equity to remain liquid. Once accounting inconsistencies emerged, investor confidence disappeared. As a result of its lack of liquidity, WorldCom was forced into bankruptcy.
What Are the Pros and Cons Of EBITDA?
To be fair, EBITDA has its merits; it actually does measure the core operating performance of a company (earnings), …