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To: Oeconomicus who wrote (137586)	1/23/2002 1:42:12 AM
From: H James Morris	Respond to of 164684

>>The SEC's attack on Ebitda. When the Securities and Exchange Commission warned investors in December to view any company's "pro forma" financial statements with "healthy skepticism," it advised them to "be particularly wary" of Ebitda--earnings before interest, taxes, depreciation, and amortization. Excellent advice. "Pro forma" is an official-sounding Latin phrase that means "earnings the way we like 'em," as distinct from earnings stated in accordance with accounting rules. What's so insidious about Ebitda--a pro forma measure favored by many companies, including AT&T, Hughes Communications, and AOL Time Warner (parent of FORTUNE's publisher)--is that it states earnings so as to leave capital's good effects in place while stripping the bad effects away completely. For example, when a company takes on capital by borrowing money, Ebitda will report any return the company might earn on that capital but will exclude its cost--the interest. If the company buys another company, say, by issuing new shares, Ebitda will report the new profits but won't mention the depreciation and amortization that necessarily come with them. And while depreciation and amortization are very, very far from perfect as a measure of capital costs, you have to admit that ignoring them is bizarrely one-sided. It's as if a football team issued an excited press release announcing it scored 21 points on Sunday--without mentioning what the other team scored. Our economic system isn't called gross-marginism or market-shareism or Ebitdaism. It's capitalism. As we read (and write) the financial news of the coming year, let's resolve not to forget that. fortune.com