Profitability, adjusted: Can tech cos convince shareholders?

EBITDA, a profitability measure, finds itself surrounded by imposters, challengers and poor cousins. A proxy gauge of cash flow, it has always been celebrated and abused in equal parts since the 1980s — the decade when it captured the attention of analysts and activist investors in the US.

The abuse bit has always been there, but the issue has received renewed attention in recent weeks, with social media trolling Indian consumer internet companies. Perhaps deservingly so, as the latter have turned brazen in their financial presentations, conjuring up innovative profitability indicators and calling them adjusted EBITDA.

Before we delve into it, here’s some context. EBITDA, short for earnings before interest, tax and depreciation and amortisation, is an imperfect marker of profitability. Easy to calculate, quick to estimate and convenient enough to explain, EBITDA multiples dictate company valuations, fundraising and even acquisitions.

While traditional investors vie for the bottom line (profit after tax in the P&L statement), EBITDA does a one over by going ‘up’ the P&L statement and ignoring certain necessary deductions (like taxes). Analysts spin it as the operating profitability of the core business without considering how it is achieved. How, i.e., with how much debt, how many assets and how much tax.