Introduction

In this lecture, we look at the topic of adjusted EBITDA. This has become almost farcical, as some companies push the boundaries of credibility in their financial reporting - we show some examples.

EBITDA is an extremely useful financial parameter, but it is prone to misuse. Rather than write at length here, we have picked a couple of really good articles which explain the pros and cons. Where EBITDA has been adjusted, as we showed in the video, particular care is required.

Excluding Loss-Makers

One trick used in reporting adjusted EBITDA or adjusted earnings is to exclude loss makers. For example, UK retailer Debenhams excluded from its P&L last year its share of the losses of an associate, an internet start-up, instead reducing the carrying value of the associate in its balance sheet - no reason or explanation was given. The amount was relatively small, but in a business desperate for survival, every little bit counts.

An even worse example was UK food delivery company Just Eat, which restated its adjusted earnings metrics to exclude its loss-making Mexican subsidiary. It's possible that the restatement may have helped management meet internal earnings targets which could have influenced bonus payments.

Our main problem with this is not that it's difficult to correct - it's obvious and easy to do so. But it's less easy for the private invetsor to spot all these tricks and even the professionals get confused. If you are a sellside analyst covering the stock, you have two choices:

1. you produce your eps forecast on a proper basis, including Mexico
2. you follow the company convention and exclude Mexico from your forecast and historical eps

If you take option 1) your eps is calculate dion a different basis from everyone else and your clients will phone you up to ask why - they can get a bit exasperated when your reason is that you are using a different basis form everyone else on the street. If you follow this practice, your clients will soon discount your forecasts, because they will assume that they are not underlying any different, but just represent an out of consenssus basis ratrher than an out of consensus view of prospects.

Analysts therefore find it difficult to resist following company practice in eps definition

This is one reason why companies like Just Eat "get away" with this sharp practice of defining their own earnings measures which defy any conventional logic or analysis. They are at least required to show a reconciliation - the table below is buried in page 33 (of 35) of the interim results release. The table above is the top of the first page.

Top of the Adjustment Charts

I am indebted to CT Capital, a brilliant spotter of accounting trickery, for drawing some top candidates for adjustments to reported earnings. Have a look at some of these:

$BCO

$CTL

Budget based EBITDA - a new one for me

$FDX

I saw the IR guy this week (October, 2019), and he was under pressure at a London breakfast from some irate shareholders who had taken exception to the last profit warning. Clearly these adjustments weren't enough!

$HAIN

Managed to convert $98m of earnings and $506m of EBITDA over three years into $712m of adjusted EBITDA.

Valeant

This is surely a classic

$PVH

long list of adjustments - they should not double space, and it at least wouldn't LOOK so bad

$KHC

$IT

$SEE

This is courtesy of Upslope Capital which published a short note.

$HOLX

The purchased R&D is a common trick among pharma companies to improve their own margins by acquiring R&D whcih of course takes it out of the P&L and cash flow operating lines.

Splunk

Possibly the winner (well maybe apart from Valeant) - converts an operating loss of $251m into $228m of profit - easy!

The comments section below is open for you to post your own candidates - for the best ones I will add the images as above to this list.

For Fun

We have also included a humorous article from Quartz which lists some alternative EBITDA definitions - it's tongue in cheek but worth a quick read.