Question 1

What is EBITDA, and why is it criticised?

Accepted Answer

**Earnings before interest, tax, depreciation and amortisation.** It strips four things out of profit to give a figure intended to show **operating performance independent of financing and accounting choices** — and it is either useful or misleading depending entirely on what you do with it.

**What each exclusion is for:**

**Interest** — depends on how the business is **financed**, not how it trades. Two identical businesses, one debt-funded, one not, differ here for reasons unrelated to operations.

**Tax** — depends on jurisdiction, structure and historic losses.

**Depreciation and amortisation** — **non-cash** charges spreading the cost of assets bought previously. They reflect accounting policy and past decisions rather than this period's trading.

**Why it became standard.** It allows comparison between companies with different capital structures, tax positions and asset bases, and it is used as a rough proxy for operating cash generation. **Business valuations are frequently expressed as a multiple of EBITDA**, so it matters directly when buying or selling a company.

**The criticisms, which are serious:**

**Depreciation represents real costs.** Equipment wears out and must be replaced. Excluding it treats a capital-intensive business as though its assets were free. Charlie Munger's remark that it should be read as "bullshit earnings" captures the objection; Warren Buffett has made the same point about management preferring a measure that ignores the cost of the machines they need.

**It is not a cash flow measure**, despite being used as one. It ignores working capital movements entirely — a business with soaring EBITDA and collapsing cash is an entirely coherent situation.

**Interest is a real obligation.** Excluding it makes a heavily indebted business look healthier than it is, which is precisely why highly leveraged businesses favour it.

**It is not a defined accounting standard**, so companies calculate it differently.

**"Adjusted EBITDA" deserves particular scepticism.** Further add-backs for restructuring, share-based payment, or "exceptional" items that recur annually can be legitimate or can be a way of excluding anything unflattering. **Always read what was adjusted.**

General information, not financial advice.

Question 2

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

Question 3

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 4

What are depreciation and amortisation?

Accepted Answer

Methods of spreading the cost of a long-lived asset across the periods it is used, rather than charging the whole cost in the year it was bought. Why it exists. A van bought for £30,000 and used for

Question 5

What is the difference between cash and accrual accounting?

Accepted Answer

When a transaction is recorded. Cash accounting records it when money moves; accrual accounting records it when the economic event happens, regardless of payment. Cash basis. Income is recorded when

Question 6

What is an earn-out, and why do acquisitions use them?

Accepted Answer

A structure where part of the purchase price is paid later, conditional on the business hitting agreed targets. It exists to bridge a disagreement about value: the seller believes the business will

Question 7

Is an NDA actually worth anything in business?

Accepted Answer

Yes, in specific circumstances — and considerably less than the people insisting on one usually believe, particularly when the thing being protected is an idea. What an NDA does. Creates a

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