The Critical 'I'

Read. React. Repeat.

Monday, November 11, 2002

Was there an actual science behind the way companies like WorldCom, Enron and AOL Time Warner cooked their books? Well, sorta. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, is a financial metric used extensively in the business world as a shorthand for how a company is doing. This piece suggests that an over-reliance on EBITDA, starting in the go-go 80s, may have led to the sloppy accounting that resulted in today's scandals.

In my former life at a boutique investment bank, I ran into the EBITDA measure a lot. I'm not a financial whiz, and I really learned only enough to be able to credibly present the numbers in a report. Basically, I agree with the ultimate message in this article, which is that you can't rely too much on any one metric, regardless of industry or conditions.

I should also admit that a lingering effect from my time looking at all those business memoranda and reports is that I go "oooooooooh" every time I run across an article like this one.