RE:RE:RE:RE:RE:RE:RE:RE:RE:CRH Trading Near 2017 LowRegister, here's why I think the deprec/amort (DA) is less important in this specific instance, just like a REIT. I'm not trying to say they are the same, just the same level of importance.
First, let's look at a case where the DA is real.
If the item being depreciated has a limited useful life, like a big industrial machine, then DA gives you a pretty good idea of how much the machine wears during out each reporting period. In other words, since you don't directly charge the cost of the machine to the income statement at the time of purchase, it's wise to charge the cost of it over time as it's used up. You can see that it's a real expense because it's a real cost of producing the company's ongoing product. And, of course, you'll have to buy another one once it's pooched.
For a REIT, they milk tons of cash flow out of an asset, then they can generally sell it for as much as they bought it for, hence the DA isn't real because the asset doesn't wear out much. (In reality the building wears out a little, but inflation of the value of the land and building offsets it. Sometimes more than offsets it.)
For CRH, the DA relates almost entirely to amortizing the price of the agreements acquired. Let's say they signed a five year deal. If the deal died at the end of the five years, then they would have to spend money to go out and get another one, hence, DA would be relevent and real. If the agreement simply rolls over, then the DA is unimportant because the cash flow continues on without any renewal cost to CRH. In other words, there is no interruption to the cash flow at the end of the DA period, therefore the DA isn't real.
With all these JVs, there is built in incentivization for the agreements to renew, therefore the DA isn't real. For the first deal that was a 100% purchase, you could make the case that the GI practice could conceivable contract with another service provider without losing any money, but this is considered to be unlikely so long as CRH performs the service well. In other words, it becomes a valued component of the total service offering and therefore becomes embedded into the practice. So, again, the DA is less likely to be real.
Oh yes, I understand that it's illegal for a GI practice (or any contracting body) to charge a fee to an anesthesia provider (or any contractor) to renew a contract, just in case you wondered.
Do you see what I mean? Nothing wears out or has to be replaced, so DA isn't real.
Now re EBITDA, I agree with your general argument, but you still have to look at the ITDA part when someone is using that technique. It could be that the company has little or no debt, therefore no interest. It could be that the DA is not important. They could be in a low tax jourisdiction. Still, your point is well taken here. Earnings generally trumps EBITDA.
But, please keep in mind that cash flow trumps earnings because ultimately the value of a business is the present value of its future cash flow, with some adjustments for current balance sheet status.
I hope this helps.
Register123 wrote: Investor22, not sure why depreciation/amortization should be dismissed in CRH's case....REITs I get, but unless CRH and their partners own the buildings they operate out of and the buildings themselves represent the lion's share of the company's worth, I think bottom line EPS is the right measure to use vs. a REIT where the service the company is providing is in fact the rental/lease of their physical real estate - in other words, the real estate is the business and the value of the REIT is tied (for the most part) to the value of the real estate........
EBITDA fans need to be careful.....interest paid, taxes, etc. are real expenses, just like any one of us must look at our income after taxes and interest we pay on mortgages / other loans to determine how much we truly have to subsequently spend/save/invest......I think that too often, fund managers tend to use EBITDA as a crutch when firms they are pumping come out with poor EPS numbers........EBITDA is emphasized and discussed while EPS is not only downplayed, but ingored in its entirety in most instances.......I think that's a dangerous game to play......