Safety in Numbers
February 18, 2020 | BY Simcha Felder
Numbers can be misleading. While data can give the impression of clarity and transparency, figures can mean different things depending on how they are presented.
For example: The Federal Reserve Chairman Jay Powell held a press conference and commented that US consumers in aggregate are propping up the economy. This phrase subtly highlights the very different situations experienced by the wide range of US consumers that are thrown together and summarized in one number. In short, the consumers that added $1.3 trillion to their savings last year are not the same ones who owe $1 trillion on their credit cards. Is this good news or bad news?
Charles Munger, one of the greatest business minds of our time and vice chairman of Berkshire Hathaway, calls out another example of misinformation by numbers, citing the proliferation of EBITDA as a fake profit metric. In business, there’s more than meets the eye in any given set of numbers. Take Uber for example. Its shares jumped last week after it announced it was moving up its EBITDA profitability target to the fourth quarter of this year.
Good investment? “It’s ridiculous,” Munger said, EBITDA — which is short for earnings before interest, taxes, depreciation and amortization — does not accurately reflect how much money a company makes, unlike traditional earnings. “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”
Today, with nearly all activities measured or recorded, it is more challenging than ever to discern what to keep track of and whether the numbers you’re seeing are telling the whole story. The right metrics enable your organization to examine concrete criteria and to meet its business goals. The wrong metrics lead you down a risky road.
Don’t risk it…Roth and Co.