Prelude Rather than bury this as a footnote, we're giving the opposition to our aversion to EBITDA a chance to present what I believe is a minority opinion. It's from an immensely rational public relations and investor relations executive, Vic Svec, a vice president of his publicly held company. (He gave us permission to use his name.) His response to my opposition to use of EBITDA in annual reports: "I understand and agree in principle with your stand. Then again, I find a number of GAAP measures similarly lacking. All measures seem to have their strengths and weaknesses. If EBITDA is comprised of EBIT + DDA*, I don't have an issue. It's when the definitions don't conform to basic addition that it gets tricky." Speaking of which: Roche, the Swiss pharmaceutical company, adds an element to its EBITDA—"exceptional items, including impairment," whatever that means. Then: "Our industry uses EV/EBITDA as the prevailing multiple for valuing coal companies—to avoid it in the highlights would make the sell-side and buy-side believe I'm hiding something. Here's one vote that you rethink this…or soften the penalty until Wall Street stops asking for it." My response: I long-since lowered the penalty to five points from the initial 10, but under certain circumstances, I discovered an entire 10 points get automatically deducted. Among early-arriving 2002s, 16% or one in six resorted to EBITDA. One, Apogee, was kept from "world-class" status, EBITDA causing it to be penalized nine points: four in the financial area (my Category 11) and an automatic five in my Category 10—does the report reflect well on the producing organization. * Svec explained that "DD&A stands for depreciation, depletion and amortization…essentially non-cash charges that are on every income statement." I didn't have the heart to go back to find out what "EV/EBITDA" stands for! For a long time, now, I've winced when coming upon annual reports of companies that make use of EBITDA. Companies from Bell Canada Enterprises to Mexico's Gruma to Adelphia to WorldCom—just a few of the "big proponents of the benchmark," according to The Wall Street Journal. The newspaper defined it as a "benchmark whose complete name is earnings before interest, taxes, depreciation and amortization." Its days, said the Journal, "may be numbered." (I opposed use of EBITDA even before Canada's Intrawest Corp. provided its very own definition—as "earnings before interest, income taxes, non-controlling interest, depreciation and amortization." And just when you think you've seen all the shenanigans companies are capable of, along comes Dayton, Ohio-based Robbins & Myers. (It not only resorts to EBITDA but—a first—EBIT, without definition. Upfront, though not in the auditors-approved financial section.) I've long cringed at seeing EBITDA crop up in annual reports. Classic example—but by no means the only one—is Bell Canada. Its revenues rose, but "net earnings applicable to common shares" declined to a 10th of the year-earlier figure. To $459 million from $4.782 billion the preceding year. What did it opt to show in its lean, four-item upfront financial highlights (13 items is the year-after-year average)? Earnings before interest expenses, income taxes, depreciation and amortization climbed year to year—to $7,467,000 from a year-earlier $6,786,000. Oh, and "cash baseline earnings applicable to common shares" likewise were up a bit—to $1,270 million from the year-earlier $1,228 million. God love 'em, they footnoted the EBITDA and cash baseline figures to indicate "The terms...do not have a standardized meaning prescribed by Canadian Generally Accepted Accounting Principles (GAAP) and may not be comparable to similar measures presented by other publicly traded companies," a footnote I'm betting the auditors insisted on. Juggle its figures no matter how hard it tried, the earnings falloff was stark—to 57 cents a share from a year-earlier $7.43. The CEO, Jean C. Monty, chairman, said "I am pleased to report that despite a tough economic environment, our financial results for 2001 were in line with our plans." Never once did he specifically, precisely address how BCE did. According to the company's website, "Mr. Monty has left the arena," as they say. Gone. Similarly making a not-so-grand exit are all annuals that fall back on EBITDA, in whole or in part-even those like Las Vegas' Mandalay Resorts, which strives to position EBITDA as appropriate for gaming companies. Rationalization, I call it. Granted, I may be wrong. And another thing: If you're headquartered in Bermuda, take off an additional 10 points. Addendum: Long-time advisor (and former corporate president) Barton J. Levin says "I wouldn't be too hard (concerning EBITDA). It has its place in financial analysis. EBITDA...yields a measure of pretax return on total capital, which is useful." Sorry, but I've decided I don't want to see companies given an out of any sort. In the words of one of the world's foremost annual report producers, "This looks like a war you've won, Sid." Full disclosure: Both Bell Canada and Mexico's Gruma subscribed to Cato Communications' in-depth annual report analysis.