Financial Intelligence, Revised Edition: A Manager's Guide to Knowing What the Numbers Really Mean

Part Four

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Several years ago, Wall Street’s favorite measure was EBITDA, or earnings before interest, taxes, depreciation, and amortization. Banks loved EBITDA because they believed it was a good indication of future cash flow. But then came a double whammy. During the dot-com boom of the late 1990s, companies such as WorldCom turned out to have cooked their books. So their EBITDA figures were not reliable. When the financial crisis hit in 2008, investors and lenders grew even more wary of any metric tied to the income statement. They realized that income statements are loaded with estimates and assumptions, and that profit shown on these statements is not necessarily real.

So now there’s a hot new metric on Wall Street: ...