Read Good, Understand the Business, Use Real Metrics... The Sisyphean task of teaching

Can we differentiate by accessing real information, understanding drivers of value and avoiding intentionally confusing and artificially embellished metrics?

An example with Lyft's typo today and a smattering of related posts.

Read Good!

In our Financial Statement Analysis class at the Texas McCombs School of Business we try to constantly emphasize the value of reading available information, whether from the financial filings or even general data gathering.

More on that here :

Or with the accessible ingredient list from 麦当劳 here, which allows us to better understand Beyond Meat :

Understand the Business!

We also try to constantly emphasize understanding the business and discussing the why and how of performance or the drivers of value, over just the what. Ideally, we focus on the business and its operations, not just the end result or a summary metric.

As covered by this graphic:

Or this post from David Senra's Founders Podcast:

Or this slide deck offering a business-focused approach to valuation :

Use Real Metrics!

We also discuss why embellished and intentionally confusing metrics (EBITDAs) are naturally quite popular, but as they do not represent real profits, real cash flows or any representative payout to investors and drastically impair comparability, they offer limited (zero?) value.

As covered in this article :

And this article where we can learn from the modern day John Malone, Kim Kardashian :

Or via this t-shirt that offers an honest take on EBITDA:

Or this opportunity to compare misunderstood/misused metrics with analogous medical treatments :

Regarding Lyft

The initial 60% reaction to Lyft this afternoon is an excellent example of, well, ignoring all of this! A sucker punch in some ways, a reminder that trying to encourage the use of real financial information matters is a Sisyphean task.

The most interesting part is that the noted 500 basis point improvement was not on any real metric, but only on Lyft’s EBITDA. A metric that ignores the core recurring operating expenses of employee compensation, depreciation, amortization, recurring restructuring costs, etc.

One specific issue with embellished metrics like EBITDA is that even if this type of forecast was not a typo, we have no idea if the 50 or 500 basis point "improvement" is related to improving operating performance or just some choice of embellishment or bookkeeping aspect.

• For example, as this is a wholly non-standardized and incomparable metric in both the cross-section and time series, they can change their EBITDA each period and make additional adjustments without otherwise improving anything.
• Or, they could shift more compensation to equity-based pay (which this metric ignores) without otherwise improving anything.
• Or, they could capitalize more of their developed technology (which this metric ignores) without otherwise improving anything. Etc.The issue is that with these vanity metrics, we really don't know...

Could this be an excellent example of the benefits of differentiation?

As we note in class, I encourage all to be the weirdo who reads, understands the business, focuses on drivers of value and avoids artificial and distracting metrics…

Of course, similar to how both Oatly and Casper mocked us in their pre-IPO filings, no one will read this…

Apologies for any errors, I rushed this as I have to get to my kid's championship basketball game, especially as the assistant coach... interestingly, they do not give out EBITDA-inspired participation trophies for this first and second grade level of competition. Update: they won, 26-24, and they did get trophies--a great team effort!