Why does Buffett prefer EBIT multiples to EBITDA multiples?

Why does Buffett prefer EBIT multiples to EBITDA multiples?

• A. EBITDA excludes capital expenditures and can hide cash used to finance operations.
• B. EBITDA is more comprehensive than EBIT.
• C. EBITDA includes taxes.
• D. EBITDA and EBIT measure the same thing.

Answer: (A)

Buffett cares about the cash a business can actually generate after keeping its assets in good shape. EBITDA leaves out capital expenditures, which are real cash outlays needed to maintain and grow the business. Because capex can be substantial, EBITDA can make a company look more cash-generative than it truly is, especially for capital-intensive businesses. EBIT includes depreciation and amortization, which reflect ongoing reinvestment needs and the wear-and-tear on assets, giving a closer sense of the true earnings power after sustaining the asset base. Using EBIT multiples thus provides a more cash-conscious, conservative view of value than EBITDA. The other statements don’t fit because EBITDA is not more comprehensive, it still excludes taxes and capex, and EBIT and EBITDA do not measure the same thing since one includes depreciation while the other does not.

Buffett cares about the cash a business can actually generate after keeping its assets in good shape. EBITDA leaves out capital expenditures, which are real cash outlays needed to maintain and grow the business. Because capex can be substantial, EBITDA can make a company look more cash-generative than it truly is, especially for capital-intensive businesses. EBIT includes depreciation and amortization, which reflect ongoing reinvestment needs and the wear-and-tear on assets, giving a closer sense of the true earnings power after sustaining the asset base. Using EBIT multiples thus provides a more cash-conscious, conservative view of value than EBITDA. The other statements don’t fit because EBITDA is not more comprehensive, it still excludes taxes and capex, and EBIT and EBITDA do not measure the same thing since one includes depreciation while the other does not.