In the misty land of adjusted and “community adjusted EBITDA” (thanks to The We Company for backing out the “building- and community-level operating expenses,”) we are reminded that to embellish is natural. We sometimes hide our worst selves and fill our dating profiles with dogs, filters, and a professed love of poetry. Corporate structures can be “simplified” yet impossible to understand. Exhibit A: The We Company.
Some die hard. EBITDA was once a metric for cable companies (due to capital expenditure and depreciation charge mismatches), since then more companies latched on as a way to overstate a cash flow proxy. It’s not a cash equivalent any more than an Argentine bond is a cash equivalent. It’s now like a Snapchat filter that smooths skin and adds glitter. Companies speak of how much they love the environment, how employees are their greatest asset, and how missions and values lead the way. How high their NPS is, even if it’s divorced from value. On paper Culture is king.
We have to filter it out. We have reviews, turnover metrics, Glassdoor. While not perfect, there should be a healthy dose of friction and skepticism. Short sellers in many ways are under-appreciated.
Amazon, in addition to being customer-centric, leads with transparency and key-value metrics, what analysts and investors are actually looking for. Their latest presentation to investors shows this. It saves investors time. “Susan, don’t spend more than 1 hour on the slides” you can almost imagine Bezos say.
Slide 1, the goal is to optimize free cash flow (and later in the deck, per share cash flow), the biggest driver of future shareholder returns. Annoying adjustments for leases and other obligations are done for you.
Transparency is the new black. Index funds may not care since they purchase blindly and in bulk, but the Clorox of the internet will demand more, especially as WeWorks of the world try to move or create completely new targets.
*In an email exchange today with a CEO of a $4B public, he company cited adjusted ebitda as a key metric for his firm since many institutional investors felt it allowed the company firm to focus on growth, which, if profitable seeds are planted now, they’d be rewarded for later. I replied that that may be the case but over a longer term horizon that free cash flow per share deserved more recognition as a reward target.