The many faces of earnings before interest, tax, depreciation and amortisation (EBITDA): Assessing the decision usefulness of EBITDA disclosure by Johannesburg Stock Exchange-listed companies

Abstract

The importance of non-GAAP earnings to users of financial reports is underscored by the assumption that, even in efficient markets, company management has superior inside information that can be decision-useful to users (Healy & Palepu 2001). However, because non-GAAP earnings are not defined in accounting standards, management decides how to label, define and calculate Orientation: The voluntary disclosure of non-Generally Accepted Accounting Principles (non-GAAP) earnings may lack decision-usefulness if not faithfully represented or comparable. Commonly accepted as being well defined, earnings before interest, tax, depreciation and amortisation (EBITDA) may be misleading if labelled, defined and calculated inconsistently.Research purpose: To assess the decision-usefulness of EBITDA disclosure by Johannesburg Stock Exchange (JSE)-listed companies.Motivation for the study: Prior research on voluntary disclosure largely excluded EBITDA from its focus, accepting it as standardised.Research approach/design and method: A quantitative content analysis was used to analyse the EBITDA disclosure in 220 Stock Exchange News Service (SENS) reports in which JSE-listed companies reported their annual results for the period 2014-2016.Main findings: Companies inconsistently labelled, defined and calculated EBITDA. Twentyfour per cent of the SENS reports labelled and defined EBITDA as earnings before interest, tax, depreciation and amortisation, but calculated it by adjusting for other items as well. Companies' definitions of EBITDA also differed widely, with 27 different definitions identified in 52 SENS reports that disclosed an unmodified EBITDA label.Practical/managerial implications: Existing JSE reporting requirements appear lacking in ensuring that companies disclose EBITDA that is faithfully represented and comparable. The identified diversity of definitions has implications where EBITDA is used for valuation and contracting purposes.

Methodological analysis of the incompatible EBITDA disclosed by companies listed on B3: identification of divergent variables in the conciliations

“…That is, this author found the opportunistic use of EBITDA through manipulations to obtain positive results even when these were negative. Mey and Lamprecht (2020) observed, between 2014 and 2016, the usefulness of disclosing EBITDA by publicly traded companies on the Johannesburg Stock Exchange. The findings indicate that the lack of explicit requirements and the generic definition in accounting standards result in inconsistencies in the indicator calculation.…”

Analysis of the Impact of Sustainable Development on Company's Value

“…EBITDA is deemed to be an important ratio that enables management to provide users of financial reports with proprietary information that, arguably, provide better decision-useful information for stakeholders (Mey & Lamprecht, 2020).…”