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The chart above shows profit before depreciation, interest and taxes. This makes no sense to me and throws the meaningfulness of the chart into doubt.
Financial firms don't have much in the way of depreciation (I would think) compared to manufacturing companies. For those companies which do have large material investments depreciation is an important part of how they make investment choices. If it weren't, than governments would not be tinkering with accelerated depreciation and the like all the time.
Similarly, interest is a basic cost of doing business and should be significant for banks and for those industrial firms that need to raise investment capital on a continuing basis. On the other hand, some firms like Microsoft are self financing and this allows them to be quite profitable.
Finally we get to taxes. Taxes are applied on profit, so I don't even know what profit excluding taxes means.
There might be some logic to graphing funds available to return to investors or keep as retained earnings as a measure of economic well being, this would be similar to cash flow.
If financial firms have been more "profitable" than other sectors then why not just say so without using all these fudge factors?
Looking back a year or two from now will these firms have been profitable or just benefiting from a bubble and the charts stopped too soon? No sector can extract excessive earnings forever, either they foster competition (autos over railroads), or they become big and inefficient (IBM), or they foster so much resentment that government is forced to step in (AT&T).
Right now the drug companies are flirting with international controls because of their excessive profits and the resulting misery that their restraint of trade causes. It may be that the financial firms will be the ones put under tighter controls first, however. Policies not Politics ---- Daily Landscape
There are whole industries where this is standard practise, media being a good example. It's a good measure, but it has its limitations as well. "C'est un scandale !"
Saying that a profit excludes interest payments for a bank is like telling GM to exclude the cost of steel.
I'm claiming its a way to show a big number even when a firm is not really doing that well.
A perfect example is the sale today of $3 billion preferred by Wachovia, paying 8% for ten years. Are they really going to be able to make a profit on these funds that will exceed 8% (even with exorbitant credit card charges), or is it a sign that they are in distress? Next year they will show an EBITDA number that omits this charge. What will that indicate about "creation" of profits? Policies not Politics ---- Daily Landscape
Sale of a bond --if I understand you correctly-- is a long term liability, a balance sheet item. Quarterly and annual amounts of interest paid to bondholders would be engrossed in the I of ITDA on the P&L. It's effect is to reduce Wachovia's taxable income. Interest earned increases the taxable income of the corporation. Similarly, DA (and "deferred tax" payments) modify taxable income of the current year. Whatever amount of net income the corporation does not wish to distribute as dividend to shareholders is the true "profit," i.e. retained earnings or surplus flow of funds at tax year end.
And we've read quite a bit about that over the past decade in the form of share buybacks and depressed wages (productivity). It's net effect --"market" inference-- is to raise the value of price per share outstanding.
So EBITDA is not the number by which the "profitability" of the ongoing concern is valued. Anyhow the "market" is more concerned with predicting future (retained) earnings. MSM focus on growth and "profit" from quarter to quarter is, to my mind, an expression of relative disinterest in the fundamental operating structure of a business.
There's more to learn about applicable GAAP, it's true. For this reason alone wise ones always read the footnotes of ARs. Diversity is the key to economic and political evolution.
