Search This Blog

Monday, December 6, 2021

Lessons From Warren Buffett: Why Depreciation Is the Worst Kind of Expense

Lessons From Warren Buffett: Why Depreciation Is the Worst Kind of Expense

April 3, 2021Lessons From Warren Buffett, Value Investing, Warren Buffett Value Investing, Warren Buffett

---------------------------------------------------------------------------------------------------

When it comes to discussing a company’s financial performance, EBITDA (earnings before interest, taxes, depreciation, and amortization), has become such a common reference point that you would think that everyone embraces its utility. However, neither Warren Buffett, nor Charlie Munger, who famously said 

“I think that, every time you see the word EBITDA, you should substitute the words ‘bullshit earnings,’”

 have much good to say about the acronym. Buffett has even gone so far as to call its widespread use a “mass delusion.”

“In respect to EBITDA, depreciation is an expense, and it’s the worst kind of an expense,” 

Warren Buffett said at the 2017 Berkshire Hathaway Annual Meeting. 

“You know, we love to talk about float. And float is where we get the money first and we have the expense later. Depreciation is where you spend the money first, you know, and, then, record the expense later. And it’s reverse float. And it’s not a good thing. And to have that enter into a multiple, it’s much better to buy a business that has, everything else being equal, has no depreciation because it has, essentially, no investment and fixed assets that makes X, than it is to buy a company where there’s a lot of depreciation in getting to X. . . . And, of course, it’s in the interests of Wall Street, enormously, to focus on something called EBITDA because it results in higher borrowing power, higher valuations, and all of that sort of thing. So it’s become very popular in the last 20 years. . . . It’s a very misleading statistic that can be used in very pernicious ways.”

------------------------------------------------------------------------------------------------------

© 2021 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Source

https://mazorsedge.com/page/13/


No comments:

Post a Comment