Don't Buy "Good" Stocks? Don't get Fooled by Management

Don't Forget About Depreciation Charges

Investors are often led astray by CEOs and Wall Street analysts who equate depreciation charges with amortization charges. In no way are the two the same: With rare exceptions, depreciation is an economic cost every bit as real as wages, materials, or taxes. Certainly that is true at Berkshire and at virtually all the other businesses we have studied. Furthermore, we do not think so-called EBITDA (earnings before interest, taxes, depreciation and amortization) is a meaningful measure of performance. Managements that dismiss the importance of depreciation - and emphasize "cash flow" or EBITDA - are apt to make faulty decisions, and you should keep that in mind as you make your own investment decisions.