EBITDA ("Bulls**t Earnings")

Charlie Munger famously said that whenever you see earnings before interest, tax, depreciation and amortisation (EBITDA) you should substitute it for bulls**t earnings. This is because it excludes items that are real and significant costs. Management that emphasises EBITDA over net profit after tax (NPAT) is being misleading.

Sometimes NPAT is also misleading. For example, an acquisitive company must amortise separately identifiable acquired intangible assets such as software and client lists. If the company also expenses software development and customer acquisition costs in the future, then amortisation is not a real cost. In this case it is better to use NPAT before amortisation (NPATA).

Easton Investments reports "underlying profit" which is EBITA (EBITDA including depreciation) when they should report NPATA in my view. They have acquired some capital light businesses in the past and so it is right to exclude amortisation, but not interest and tax. I said as much to MD Greg Hayes.

I based my valuation of Easton on NPATA, so does it matter if management is pushing "underlying profit"? Yes, because it could be that they are deliberately intending to mislead and dishonest management is an automatic sell in my book. When I broached the topic with Greg, he said that they use "underlying profit" because it is historically consistent. But I don't see any impediment to calculating historical NPATA. I'm prepared to give the benefit of the doubt for now.

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