People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.
I think that, every time you saw the word EBITDA, you should substitute the word "bullshit" earnings.
Total Income / Average Assetsand the Leverage Ratio is
Average Assets / Average Shareholders Equity. If you observe closely, the DuPont Identity gives back the original definition we shared if we cancel out the relevant numerators and denominators from the above formula. However, by breaking up ROE into 3 different ratios, we can now know how the ROE figures of Bombay Dyeing ended up getting inflated.
Total Assets - Current Liabilitieswhich is just another way of using the accounting equation. The former method of looking at capital is called the financing approach and the latter method is called the operating approach. We can also use
Average Capital Employedto prevent looking at skewed ratios because of abrupt changes in Shareholders Equity or Non Current Liabilities.
The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics. Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered.In the end, plenty of unintelligent capital allocation takes place in corporate America. (That's why you hear so much about "restructuring.") Berkshire, however, has been fortunate. At the companies that are our major non-controlled holdings, capital has generally been well-deployed and, in some cases, brilliantly so.
Shareholders Equity + Non-current Liabilitiesbut it can also be written as
Total Assets - Current Liabilitiesusing the operational approach. We can exclude