Traditional value investors have questioned the thinking behind EBITDA (earnings before interest, taxes, depreciation, and amortization) accounting for some time, but the adjusted EBITDA craze of the last couple of years is taking “fuzzy accounting” to a whole new level. Take fitness monitoring wearable firm Fitbit for example.
Fitbit is growing and doing well, and is actually profitable by any reasonable accounting standard. That said, Fitbit, who is undertaking an IPO, has chosen to report their profits using their own adjusted EBITDA method.
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Fitbit’s real profits
Based on Fitbit’s own adjusted EBITDA profit metric, the firm earned a total of $270 million in 2014 and 2013 combined. However, when generally accepted accounting practices are applied to the numbers, the firm’s actual profit was only $80 million. The trend continues into 2015, as the company reported $93 million in adjusted earnings in the first three months of 2015 when its actual profit (by general accounting practices) was $47 million, or barely half the profit the firm is telling investors it made.
The adjusted EBITDA trend
Over the last few years, a growing number of companies, especially firms in the tech sector such as Etsy and Twitter, are choosing to use their own version of adjusted EBITDA when reporting results to shareholders. Perhaps more troubling, based on recent data from the Associated Press, the gap between the adjusted EBITDA companies report as their earnings and their actual earnings is growing rapidly.
More on Fitbit
For the sake of fairness, it should be pointed out that the difference between Fitbit’s adjusted earnings and its actual profits is quite a bit less than what many other companies are reporting. Fitbit’s adjusted earnings were $191 million in 2014, $59 million more than what it actually made in net profits by the usual accounting standards. Twitter, in comparison, reported earnings measured by adjusted EBITDA were $300 million last year. However, by standard accounting practices, the social media firm’s actual net “profit” was a loss of $578 million, which adds up to a total difference of almost $900 million.
Also of note, earlier this week, Fitbit announced it was offering more shares than it had originally planned in its IPO, and also boosted the price range for the offering, suggesting a very high level of investor interest.