EBITDA lies to you

Clickbait title, right? Well, you clicked so it worked :)

I got to this title when thinking of this quote: “Past results don’t predict future results; past behavior predicts future behavior, which then drives future results.”

We are all surrounded by people (and companies) being judged on past results to predict their future (results). However, looking at just the results depicts a partial image of the situation.

The EBITDA Illusion

Suppose you are evaluating a company. They report a €5M EBITDA (and 10% ROS, which, depending on the industry, can be a good result).

On paper, that’s impressive. It signals profitability and operational efficiency. But here’s the catch: EBITDA is an outcome.

It reflects what happened, but not how or why it happened.

There is a lot more going on in a complex organization than the mere EBITDA result. Whereas such metric is useful to get a synthetic understanding of the business performance, it does not account for why did the company get to that performance.

Why Behavior Is the Real Predictor:

Behavior reflects a company’s (or a person’s) internal engine: the routines, decisions, priorities, and responses that repeat over time.

Unlike results, behavior tends to be consistent, and most importantly is way more difficult to change in the short term!

Even if it sounds counterintuitive, judging for behavior is better because it can imply that a person (or company) is undervalued (the positive behavior is not still reflected in the EBITDA, as outcomes take time to manifest) or overvalued (the company is sitting on past glories, but the behavior is negative, indicating future challenges).

By flipping the script, we can see the world through a new lens. It is not so easy though, because one big advantage of the EBITDA is that it is the synthetic metric par excellence, meaning the one which aims to sum the overall performance of a company. Behaviors are way more difficult to assess, understand, and study: we really need to deep dive into the daily operations of the company (or the person).

However, I believe that the upside of studying (and evaluating companies, investments, people, you name it) the behavior pays off, especially in the longer term!

Conclusion

It’s tempting to judge based on outcomes. They’re tangible and easy to measure. When evaluating performance, for both people and companies, focus on patterns of behavior.

Because these patterns are what drive sustainable results: not isolated data points.