EBITDA-One of Wall Streets Greatest Gags

               Bay Street must be getting desperate for business as  they have returned to issuing buy recommendations based on EBITDA (earnings before interest charges, taxes, depreciation and amortization).  This makes corporate earnings appear better than they actually are by taking profit or loss and adding back interest charges, taxes, depreciation and amortization.  EBITDA is a dangerous measure to rely on because it can make a money-losing company look profitable.  Specifically, since very few companies have zero debt, the ability to pay interest charges is a necessity and without doing so the company goes bankrupt. 

                More importantly, there is not one company that Revenue Canada (RC) has told not to worry about paying taxes.  In fact, all taxes owed must be paid before wages, debt charges, and suppliers.  Failure to do so will equate to interest charges on taxes owed and on any penalties imposed.  Plus there is a chance the bosses could get a trip to jail. 

                To base a company’s future on EBITDA is a waste of time.  We strongly suggest you avoid all buy recommendations based on this metric because management and brokerage houses are trying to make the company look better than it actually is.  More importantly, EBITDA does not conform to generally accepted accounting principles (GAAP), the industry standard for financial reporting. 

                Both Bay Street and Wall Street love to dream up special definitions to make themselves more money at the investor’s expense.  We will give the real meaning of some of a brokerage firm’s lingo and practices. 

SELL:     This term is only used when there is no possibility of hiding that the company is in completely dire straits and recommending the stock becomes a liability

NEUTRAL/HOLD:           This either means hold the security or sell everything.  This interpretation is up to the investor.

 BUY:      This recommendation can mean that it is a quality company.  However, on far more occasions than investors realize, it will mean that management has built up a holding in the security or the brokerage house is responsible for underwriting the shares and releasing them into the market.  The company’s shares can be sold through the firms’ mutual funds, individual accounts, or hedge funds.  A “buy” recommendation is often intended to get the small investor to drive up the price so Bay Street may sell their holdings at a profit.

                 There are a number of financial instruments that were created over time that have benefited us greatly.  However, most of them were intended for enterprise rather than the consumer but Wall Street has offered them to the retail customer. To be continued...