Journal of Economic and Financial Sciences

ISSN: (Online) 2312-2803, (Print) 1995-7076

Page 1 of 13 Original Research

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

Authors: Orientation: The voluntary disclosure of non-Generally Accepted Accounting Principles

Mattheus T. Mey1
(non-GAAP) earnings may lack decision-usefulness if not faithfully represented or comparable.
Christiaan Lamprecht1
Commonly accepted as being well defined, earnings before interest, tax, depreciation and
Affiliations: amortisation (EBITDA) may be misleading if labelled, defined and calculated inconsistently.
1
School of Accountancy,
Faculty of Economic and Research purpose: To assess the decision-usefulness of EBITDA disclosure by Johannesburg
Management Sciences, Stock Exchange (JSE)-listed companies.
Stellenbosch University,
Cape Town, South Africa Motivation for the study: Prior research on voluntary disclosure largely excluded EBITDA
from its focus, accepting it as standardised.
Corresponding author:
Mattheus Mey, Research approach/design and method: A quantitative content analysis was used to analyse
[email protected] the EBITDA disclosure in 220 Stock Exchange News Service (SENS) reports in which JSE-listed
Dates: companies reported their annual results for the period 2014–2016.
Received: 20 June 2019
Main findings: Companies inconsistently labelled, defined and calculated EBITDA. Twenty-
Accepted: 15 May 2020
Published: 09 July 2020 four 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’
How to cite this article: definitions of EBITDA also differed widely, with 27 different definitions identified in 52 SENS
Mey, M.T. & Lamprecht, C.,
reports that disclosed an unmodified EBITDA label.
2020, ‘The many faces of
earnings before interest, Practical/managerial implications: Existing JSE reporting requirements appear lacking in
tax, depreciation and
amortisation (EBITDA): ensuring that companies disclose EBITDA that is faithfully represented and comparable. The
Assessing the decision identified diversity of definitions has implications where EBITDA is used for valuation and
usefulness of EBITDA contracting purposes.
disclosure by Johannesburg
Stock Exchange-listed Contribution/value-add: The study contributes to the voluntary disclosure literature by
companies’, Journal of focussing on a non-GAAP earnings measure that has largely been ignored by prior research,
Economic and Financial
namely EBITDA. Empirical evidence is presented on the diversity that exists in EBITDA
Sciences 13(1), a488.
https://doi.org/10.4102/jef. disclosure by JSE-listed companies.
v13i1.488
Keywords: EBITDA; non-GAAP; decision useful; comparability; faithful representation;
Copyright: inconsistency.
© 2020. The Authors.
Licensee: AOSIS. This work
is licensed under the
Creative Commons
Einführung
Attribution License. Earnings before interest, tax, depreciation and amortisation (EBITDA), widely perceived as
accounting EBITDA (Brown 2016; International Accounting Standards Board [IASB] 2017a), is an
important non-GAAP earnings measure (Papa, Peters & Schacht 2016). Non-GAAP earnings,
although not defined in accounting standards, is seen by financial executives and investors as an
important disclosure tool that enables management to provide users of financial reports with
proprietary information that, arguably, provide better decision-useful information than GAAP
earnings (Graham, Harvey & Rajgopal 2005; Papa et al. 2016). Generally Accepted Accounting
Principles (GAAP) earnings encompass any earnings measure that is defined in accounting
standards.
Read online:
Scan this QR The importance of non-GAAP earnings to users of financial reports is underscored by the
code with your
smart phone or assumption that, even in efficient markets, company management has superior inside information
mobile device that can be decision-useful to users (Healy & Palepu 2001). However, because non-GAAP earnings
to read online.
are not defined in accounting standards, management decides how to label, define and calculate

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 Page 2 of 13 Original Research

non-GAAP earnings. This discretion could result in the extent to which EBITDA was comparable between
inconsistencies between how companies calculate non- companies and to assess whether the definition was consistent
GAAP earnings, raising the concern of a lack of comparability with the EBITDA label. For example, if a company discloses
(IASB 2017a). A further concern is that if non-GAAP earnings an unmodified EBITDA label, but defines it as adjusting for
are inaccurately labelled and inadequately explained, it may items other than ITDA-adjustments, the label may be seen as
not be faithfully represented, but misleading (IASB 2017a). not faithfully representing its measurement. In contrast, a
modified EBITDA label that includes an indication of further
Recent evidence from European institutional investors showed adjustment, for example, ‘adjusted EBITDA’, may be seen as
that professional investors, in predicting the future cash flows a faithful representation as users would be informed not to
of companies, perceive EBITDA as being more relevant and a assume that the measure only excludes ITDA-adjustments.
more faithful representation than bottom-line GAAP earnings
(Cascino et al. 2016). In addition, anecdotal evidence suggests The third and last research objective was to recalculate
that, for valuation purposes, EBITDA is widely used in South EBITDA based on the definition provided in order to assess
Africa (Hattingh 2012). Contrary to the perception of its whether the adjustments made in calculating EBITDA agreed
standardised format, evidence exists suggesting that to the definition provided. SENS reports that disclose-
companies are not consistent on how they calculate EBITDA modified EBITDA labels already exhibit a measure of faithful
(Hitz 2010; IASB 2016). Inconsistencies in the presentation and representation by indicating that adjustments other than
calculation of EBITDA are possible because it is not those implied by the accepted definition of EBITDA can be
comprehensively defined in accounting standards, nor does expected. In contrast, SENS reports with unmodified EBITDA
explicit disclosure requirements exist. Leaving the quality of labels may be more at risk of a lack of faithful representation
disclosure up to the discretion of management may result in if inconsistencies exist between the label, definition and
EBITDA information that is not decision-useful. calculation. In particular, where SENS reports disclose an
unmodified label and either provides the standard definition
The research question this study attempts to answer is whether or no definition, users may be inclined to assume an EBITDA
EBITDA disclosure by companies listed on the Johannesburg calculation that adjusts for ITDA-adjustments only.
Stock Exchange (JSE) is decision-useful to the users of financial Therefore, only SENS reports that disclosed an unmodified
statements. To answer the research question, two concepts label were included in this objective.
underlying decision-usefulness of financial information,
namely faithful representation and comparability (IASB 2018), Literature review
were assessed. A faithful representation requires a complete
depiction of all the information necessary to understand a
Decision-usefulness of earnings before interest,
tax, depreciation and amortisation – Faithful
particular economic phenomenon (IASB 2018). Moreover, a
representation and comparability
faithful representation will also enable a degree of
comparability as sufficient information is provided to enable The disclosure of non-GAAP earnings, as an alternative
users to make comparisons (IASB 2018). While companies representation of a company’s performance, is widely used in
label, define and calculate EBITDA in an inconsistent manner, financial reports. Evidence of the extent of non-GAAP earnings
without providing complete disclosure necessary to disclosure in press releases has been provided for companies
understand the inconsistencies, the resultant information may in the USA (Bhattacharya et al. 2004), Canada (Entwistle,
not be decision-useful (IASB 2017a; PWC 2014). In this sense, Feltham & Mbagwu 2005) and Europe (Aubert & Grudnitski
consistency also refers to the congruency between the EBITDA 2014). The disclosure of non-GAAP earnings in annual reports
label, definition and calculation. has also seen an increase in New Zealand (Rainsbury, Hart &
Buranavityawut 2015), Australia (Cameron 2012) and South
Three research objectives were set to address the research Africa (Howard, Maroun & Garnett 2019).
question. The first research objective was to describe how
companies labelled EBITDA when discussing their annual From a normative theoretical perspective provided by the
performance. This objective intends to assess whether only the Conceptual Framework for Financial Reporting of the IASB,
expected adjustment to earnings was made, or if any other a vital characteristic necessary for non-GAAP earnings to be
adjustment were made. For example, a company could present a faithful representation is for companies to provide
an unmodified EBITDA label, thereby suggesting it to be a complete information about the non-GAAP performance
standardised measure that only adjusted International measure that will enable users to better understand the
Financial Reporting Standards (IFRS) earnings with interest, measure and prevent them being misled (IASB 2018).
tax, depreciation and amortisation (ITDA-adjustments). Providing complete information will also facilitate
Alternatively, a company could present a modified EBITDA comparability (IASB 2018), as users will be able to determine
label (e.g. ‘adjusted EBITDA’) that indicated that EBITDA was how different companies calculate non-GAAP earnings.
also calculated by adjusting for other items. While most non-GAAP earnings measures already convey
to the users a warning of non-standardised compilation,
The second research objective was to identify how companies seemingly standardised non-GAAP earnings measures,
defined EBITDA. This objective was necessary to determine such as EBITDA, may be more risk of not being faithfully

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 Page 3 of 13 Original Research

represented if inaccurately labelled or inconsistently Furthermore, they found that EBITDA was less able to predict
calculated. profitability than GAAP earnings. All three of these EBITDA-
focussed studies assumed EBITDA to be standardised,
Earnings before interest, tax, depreciation and amortisation consisting of ITDA-adjustments only. Whether inconsistencies
is, because of its seemingly defined nature, more likely to be existed between how companies labelled, defined and
susceptible to biased disclosure, because management can calculated EBITDA were not investigated nor considered.
make adjustments other than ITDA-adjustments and still
label the measure so calculated as EBITDA. Recognising the A limited number of studies provide evidence of inconsistent
risk of misuse, analysts have raised their concerns that EBITDA disclosure. Isidro and Marques (2013) investigated
reported EBITDA may be misleading because the adjustments non-GAAP earnings disclosed in press releases of the top 500
that companies make are inconsistent between companies European-listed firms for the year 2005 and identified only
(IASB 2017a; Papa et al. 2016). Therefore, in the absence of four (of the 500) instances where disclosed EBIT and EBITDA
proper disclosure, if the calculation includes adjustments were not compiled from the respective adjustments for interest,
other than ITDA-adjustments, then EBITDA will not be tax, depreciation and amortisation. In the Australian-based
faithfully represented. study, Cameron (2012) investigated the prominence of non-
GAAP earnings in the annual reports of the top 50 Australian-
Earnings before interest, tax, depreciation and listed companies from 2007 to 2009. Cameron (2012) identified
amortisation in voluntary disclosure literature modified variants of EBIT and EBITDA (e.g. underlying
EBITDA) made up the majority of non-GAAP earnings
According to Verriest, Bouwens and De Kok (2019), EBITDA
reported in the narrative sections of the annual reports.
has largely been excluded from the scope of voluntary
Although Cameron (2012) found inconsistencies in the types
disclosure research. A possible reason for the exclusion from
of adjustments made in deriving at the modified EBITDA, no
prior studies is the perception of EBITDA as a defined measure
details of the types of inconsistencies nor details of any
(e.g. Allee et al. 2007; Entwistle, Feltham & Mbagwu 2010). In
discrepancies between how companies labelled EBITDA and
their questionnaire to 81 professional investors from 16
defined EBITDA were provided. South African evidence on
countries, Cascino et al. (2016) referred to EBITDA in its
the extent and nature of EBITDA disclosure in financial reports
standardised format, suggesting that investment professionals
is lacking. In assessing potential opportunistic use of non-
also view EBITDA as a defined measure. Earnings before
GAAP earnings in the annual reports of JSE-listed companies
interest, tax, depreciation and amortisation is also discussed
from 2010 to 2014, Howard et al. (2019) included ‘EBIT’ as a
in various tertiary textbooks as a standardised measure that
search term, but did not provide any evidence on the nature or
only adjusts for interest, tax, depreciation and amortisation
extent of EBITDA reporting by South African companies.
(O’Regan 2006; Walton 2000; White, Sondhi & Fried 2003).

Studies that have focussed on the prevalence and Disclosure transparency and its effect on
informativeness of EBITDA include D’Souza, Ramesh and different types of users
Shen (2010), Rozenbaum (2019) and Verriest et al. (2019). The way in which non-GAAP earnings measures are presented
D’Souza et al. (2010) investigated press releases of US may influence users’ perceptions about a company’s
companies over the period 2000–2003 and found that performance. In particular, less-sophisticated users may be
companies where depreciation and interests costs tended to be more susceptible to mispricing company shares if they are
more prevalent were more inclined to disclose more unable to understand whether the information is reliable and
information about the line items that make up EBITDA (i.e. accurately presented (Young 2014). As argued by Johnson and
ITDA-adjustments). They interpreted this finding as being Schwartz (2005), if users of financial reports fixate on earnings
consistent with the management of those companies wanting figures displayed more prominently and ignore other relevant
to place focus on EBITDA as a more comparable measure than information disclosed elsewhere in a financial report, those
bottom-line earnings (D’Souza et al. 2010). Pointing out the users may make decisions based on incomplete information.
risk of overreliance on EBITDA, Rozenbaum (2019) found Similarly, if users of financial reports fixate on the EBITDA
evidence in US companies’ earnings announcements from label by which management refers to EBITDA when discussing
2003 to 2011 that management who fixate on EBITDA, vis-à-vis company performance, users may ignore the information
GAAP earnings, when making investment and lending contained elsewhere in the financial report that indicates that
decisions over-invest in capital and over-lever their firms. In EBITDA was modified for items other than ITDA-adjustments.
addition, management was more inclined to disclose EBITDA However, if an EBITDA label indicates that EBITDA has been
where it was linked to executive compensation contracts modified, users would be prompted to inspect the financial
(Rozenbaum 2019). Verriest et al. (2019) extended the above- report further to determine the types of adjustments made.
mentioned line of inquiry and investigated the prevalence and
validity of EBITDA reporting in the 22 354 annual reports and In support of the above-mentioned argument, Elliott (2006)
57 911 press releases of US companies over the period 2005– provided experimental evidence, suggesting that less-
2016. They found that 25% of annual reports and 18% of press sophisticated investors tend to fixate on more prominently
releases disclosed EBITDA, but found no evidence that disclosed non-GAAP earnings. A solution to the problem of
companies were opportunistic when reporting EBITDA. fixation by less-sophisticated users may be to increase

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 Page 4 of 13 Original Research

disclosure transparency by providing complete information companies. Content analysis is a research method used to
(Young 2014). While EBITDA is used in modified format (i.e. describe the content of communication in an objective and
where items other than ITDA-adjustments are adjusted for), systematic manner and is a method often used in analysing
the label should then reflect that adjustments were made and text (Beattie 2014; Bryman 2012). Although content analysis
the financial report should include a definition of how can also be used to investigate the meaning conveyed by a
the measure was compiled. Doing so will provide particular content (referred to as the latent content), this
complete information as envisaged by the IASB’s Conceptual study focussed on describing the manner in which companies
Framework for Financial Reporting, thereby facilitating a labelled, defined and calculated EBITDA. The content of
faithful representation of the measure. EBITDA labels and definitions included in SENS reports
enabled an analysis of the extent to which the information
Disclosure requirements of the Johannesburg lacked faithful representation and comparability.
Stock Exchange
As a capital market regulator in South Africa, a key responsibility The unit of analysis in this study was the SENS reports of
of the JSE is to ensure that high-quality financial reporting is JSE-listed companies in which EBITDA was disclosed as a
maintained by JSE-listed companies. With the exception of measure of financial performance for the financial years
headline earnings and pro-forma information, the JSE has no ending in 2014–2016. The period was selected to allow for
explicit disclosure requirements pertaining to the disclosure of a sufficient number of observations and to provide
non-GAAP earnings in SENS reports (Johannesburg Stock evidence of recent disclosure practices by South-African-
Exchange Limited [JSE] 2017) (Authors’ comment: While listed companies.
documenting the results of this study, the JSE issued, for public
comment, a proposed revision to its non-GAAP earnings Data collection
disclosure requirements; JSE 2019). Therefore, when companies
The data were collected by first considering the population.
report their annual results through SENS and include other
The population in this study included all SENS reports that
non-GAAP earnings in the report, the SENS report needs only
met the search criteria of disclosing EBITDA as a measure of
to meet the general disclosure requirements of the JSE. Those
companies’ annual performance. By focussing on the total
requirements are that the SENS report is prepared in accordance
population of companies that disclosed EBITDA, sampling
with the IASB’s concepts underlying decision-useful
errors were eliminated. Initially, a list of all JSE-listed equities
information, as stipulated in the Conceptual Framework for
was obtained. Duplicate entries (where companies appeared
Financial Reporting and the presentation and disclosure
more than once because of more than one type of listed
requirements of International Accounting Standard 34 Interim
equity), as well as entries where the respective companies
Financial Statements (IAS 34) (JSE 2017). The conceptual
listed outside the period used in the study, were removed.
framework, however, is concepts-based and does not provide
explicit disclosure requirements (IASB 2018). This lack of Table 1 presents the population of SENS reports containing
explicitness leaves management with discretion in how to valid instances of EBITDA as a performance measure, as
report non-GAAP earnings. International Accounting Standard compiled from the initial list of 440 listed equities on the
34 too is silent on specific disclosure requirements in instances IRESS database.
where companies disclose non-GAAP earnings as a sub-total
in, or adjacent to, the income statement (IASB 2017b), which in Following the example of Malone, Tarca and Wee (2016), the
the case of SENS reports means that management can use search functionality in Adobe Acrobat was used to search
discretion in how EBITDA is labelled, defined and calculated. across the PDFs of the final population of SENS reports for
In contrast, reporting requirements already set by international the search term ‘EBITDA’. This narrow search term could
regulators, for example, the United States Securities and have resulted in the exclusion of SENS reports that did not
Exchange Commission (SEC), are explicit in how non-GAAP use the acronym ‘EBITDA’, but instead, use a narrative
earnings should be labelled, defined and calculated (Securities depiction, namely ‘earnings before interest, tax, depreciation
and Exchange Commission [SEC] 2003, 2018). and amortisation’. However, as shown earlier, the literature
indicates that companies commonly use the acronym
In the light of increased reporting costs associated with more ‘EBITDA’ when referring to ‘earnings before interest, tax,
transparent reporting and the risk of information overload depreciation and amortisation’ and the use of the narrower
from too much disclosure (Young 2014), an important search term reduced subjectivity in the use of other
consideration for the JSE should be whether its existing search terms.
reporting requirements are adequate in ensuring that
companies disclose EBITDA that is decision-useful. Of the 329 SENS reports in the initial selection, a total of 307
SENS reports disclosed EBITDA. As the focus of the study
Research design was on instances where EBITDA was disclosed as a measure
of company performance, the next step was to identify the
Research approach and strategy SENS reports in which EBITDA was presented as a measure
A quantitative content analysis was used to analyse the of annual performance. This step was necessary as
EBITDA disclosure in the SENS reports of JSE-listed some companies disclosed EBITDA not as a measure of

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 Page 5 of 13 Original Research

TABLE 1: Determining the population of SENS reports containing earnings before interest, tax, depreciation and amortisation as a performance measure.
Population selection process Companies Company-years (SENS reports)
Initial identification of JSE-listed companies on IRESS database
Total number of JSE-listed equities on the IRESS database at time of data collection. 440 -
Less: Number of companies with more than one type of issued equity (e.g. preference and ordinary shares), thereby (66) -
removing duplicate selections.
Sub-total 374 -
Less: Number of companies for which no SENS report was available as listing occurred after 2016. (45) -
Remaining number of companies whose SENS reports for the period 2014–2016 were downloaded in PDF format 329 -
from the IRESS database and searched for the disclosure of EBITDA.
Determining the population
Identification of SENS reports in which the 329 companies identified above disclosed EBITDA. - -
SENS reports in which EBITDA was disclosed for any of the financial years ending in 2014, 2015 and 2016. 125 307
Less: SENS reports in which EBITDA was not disclosed as a performance measure. (39) (87)
Final population of companies and SENS reports 86 220
EBITDA, earnings before interest, tax, depreciation and amortisation; JSE, Johannesburg Stock Exchange; SENS, Stock Exchange News Service.

TABLE 2: Research objectives linked to the data recording process and data analysis.
Research objective (RO) Data recording Data analysis
RO 1 Describe how EBITDA was labelled. Document how SENS reports labelled EBITDA. Descriptive statistics through the use of
frequency tables.
RO 2 Identify how EBITDA was defined and assess Document how SENS reports defined EBITDA. Descriptive statistics through the use of
whether the definition is consistent with the label. Document list of all definitions. frequency tables.
Document instances where definitions were inconsistent Disclosure of a list of definitions identified.
with labels.
RO 3 Recalculate EBITDA based on the definition and Document instances where the recalculated EBITDA Descriptive statistics through the use of
assess whether the calculation is consistent with differs from the reported EBITDA frequency tables.
definition and label.
EBITDA, earnings before interest, tax, depreciation and amortisation; SENS, Stock Exchange News Service.

performance, but for other purposes. For example, some unmodified, was documented for each of the 220 SENS
companies disclosed EBITDA as an input used in determining reports. Figure 1 depicts an extract from RCL Foods Limited’s
the fair value of items. 2016 SENS report to illustrate an instance where an
unmodified EBITDA label was disclosed.
Of the initial population of 307, 87 company-year
observations, where EBITDA was disclosed in a SENS report In contrast to the disclosure of an unmodified EBITDA label
but not as a measure of performance, were excluded. After in Figure 1, Figure 2 provides an example of a modified
excluding the 87 company-year observations, the final EBITDA label, as disclosed in the 2016 SENS report of Adcorp
Holdings Limited. Figure 2 shows that EBITDA was labelled
population of 220 company-year observations, relating to 86
as ‘normalised EBITDA’, which suggests that EBITDA was
companies, remained. The number of companies was 71 in
not calculated by adjusting for ITDA-adjustments only.
2014, 72 in 2015 and 77 in 2016. With the exception of the oil
and gas industry and the utilities industry, the population
of 220 SENS reports included all the JSE industries. No Research objective 2
single industry appeared over-represented. The highest Research objective 2 was to identify how EBITDA was defined
concentration of EBITDA reporters was found in the in the 220 SENS reports. Through the use of the search terms
following industries, making up 81% of the total population: ‘EBITDA’, ‘EBIT’, ‘earnings before’ and ‘before’, the entire
industrials (30%), basic materials (28%), consumer services SENS report was searched to identify any instance where a
(14%) and technology (9%). definition of EBITDA was provided. The additional search
terms were deemed necessary for in case a SENS report
Once the population was determined, the SENS reports of disclosed an unmodified EBITDA label (which would have
those companies were systematically analysed and the resulted in being selected when performing the first research
relevant data recorded in line with the stated research objective), but then disclosed a narrative definition of ‘earnings
objectives of the study. Table 2 presents a summary that links before...’ without referring to the term EBITDA again.
the research objectives with the data recording process that Therefore, although the search term ‘EBITDA’ might have
was followed. The table also indicates the techniques used to sufficed, in order to obtain assurance about the completeness
analyse the data. Table 2 is followed by an explanation of the of the search, the other search terms were also used when the
data recording process with illustrative examples. term ‘EBITDA’ did not lead to the discovery of a definition.

Research objective 1 Figure 3 provides an example of how EBITDA was defined in

To achieve the first research objective of determining how the 2016 SENS report of RCL Foods Limited. Appearing in
companies labelled EBITDA in their SENS reports, the first the income statement, EBITDA was defined as ‘Operating
occurrence of an EBITDA label, whether modified or profit before depreciation, amortisation and impairment’.

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Source: RCL Foods Limited, 2016, SENS report - Group financial results and cash dividend declaration for the 12 months ended 30 June 2016, IRESS Expert, Johannesburg. Authors’ emphasis.
FIGURE 1: Extract from RCL Foods Limited 2016 Stock Exchange News Service report – Example of an unmodified earnings before interest, tax, depreciation and
amortisation label.

Source: Adcorp Holdings Limited, 2016, SENS report - Audited summary consolidated and separate provisional results for the year ended 29 February 2016, IRESS Expert, Johannesburg. Authors’ emphasis.
FIGURE 2: Extract from Adcorp Holdings Limited 2016 Stock Exchange News Service report – example of a modified earnings before interest, tax, depreciation and
amortisation label.

In contrast to the previous example, in its 2016 SENS report, include an adjustment for goodwill impairment together
Adcorp Holdings Limited narratively defined ‘normalised with the other ITDA-adjustments. Consequently, an attempt
EBITDA’ (as shown in Figure 2) as ‘EBITDA excluding share- was made to recalculate the EBITDA amount by using the
based payments, lease smoothing, and establishment and adjustments stated in the definition provided by the company.
transaction costs’.
Where no definition was provided, or where the amount was
not included as a line item in either the income statement or
Research objective 3 in a tabular reconciliation, it was assumed that the company
The third and last research objective was to recalculate the implicitly defined EBITDA as IFRS earnings from continuing
amount disclosed as EBITDA, by using the definition of operations before interest, tax, depreciation and amortisation.
EBITDA disclosed in a SENS report. This objective was only For example, the 2015 SENS report of Omnia Holdings
performed for SENS reports that disclosed an unmodified Limited disclosed an unmodified EBITDA label and provided
no definition, nor reconciliation to IFRS earnings (Omnia
EBITDA label. By recalculating EBITDA based on the
Holdings Limited 2015). In such an instance, a recalculation
definition disclosed, any inconsistencies between how those
of the EBITDA amount was attempted by using the amounts
SENS reports labelled, defined and calculated EBITDA could
for interest, tax, depreciation and amortisation as obtained
be assessed. For example, the 2014 SENS report of MTN
from the income statement and related notes.
Group Limited disclosed an unmodified EBITDA label, but
defined EBITDA as ‘Earnings before interest, tax, depreciation
and amortisation and goodwill impairment’ (MTN Group Data analysis
Limited 2014). Based on the definition provided, it was Descriptive statistics, namely frequency tables and graphical
expected that the amount disclosed for EBITDA would figures depicting frequencies, were used as a primary form

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 Page 7 of 13 Original Research

of analysis necessary to achieve the research objectives performance discussions. The occurrences of the various
(Saunders, Lewis & Thornhill 2016:553). Initially, frequency labels used in the SENS reports are provided per year and in
tables were used to describe how companies labelled total and sorted from most frequent to the least frequent.
EBITDA. A list of EBITDA definitions was then compiled to
assess potential diversity in how companies define EBITDA, As indicated in Table 3, the results show that 74% of the
after which the frequency of inconsistencies between the total population (163 of 220 SENS reports over the period
EBITDA labels and definitions was tabled. Lastly, EBITDA 2014–2016) disclosed an unmodified EBITDA label when
was recalculated in terms of the definition provided and the discussing the performance of a company. The remaining
results of inconsistencies were graphically linked to provide 57 SENS reports (26% of 220) disclosed a modified EBITDA
descriptive evidence necessary to determine the extent to
label that indicated that adjustments other than ITDA-
which companies labelled, defined and calculated EBITDA
adjustments were also made. Although not directly
in an inconsistent manner.
comparable, these findings are somewhat consistent with
Isidro and Marques’ (2015) finding, where 39% of their sample
Data quality and integrity of European companies disclosed modified labels for earnings
To limit the risk of inconsistencies arising from using more before interest and tax (EBIT) and EBITDA. By disclosing
than one researcher, only one researcher was involved in modified EBITDA labels, the 57 SENS reports clearly informed
compiling the EBITDA labels and definitions from the SENS users not to expect a standardised EBITDA calculation.
reports. The risk of data capturing errors was addressed by Whether the 163 SENS reports that disclosed an unmodified
having an independent person verify, on a random basis, the EBITDA label provided a faithful representation by defining
data captured (Bryman 2012:304). In addition, the ‘codebook’
function of the statistical software STATA was used to identify TABLE 3: List of earnings before interest, tax, depreciation and amortisation
any instances of missing data entries, which were then labels in Stock Exchange News Service reports and the frequency of occurrences
per year for the period 2014–2016 (N = 220).
rectified.
Number EBITDA LABEL 2014 2015 2016 Total
Unmodified EBITDA label disclosed in 163 SENS reports

Ethical consideration 1 EBITDA 53 56 54 163

Modified EBITDA labels disclosed in 57 SENS reports
Ethical approval to conduct the study was obtained from 2 Adjusted EBITDA 5 5 7 17
the Humanities Research Ethics Committee at Stellenbosch 3 Normalised EBITDA 5 3 5 13
University (approval number: ACC-2017-0861-506) on 4 Underlying EBITDA 3 3 5 11
28 August 2017. 5 EBITDA excluding special items 1 1 1 3
6 Operational EBITDA 1 1 1 3
7 Core EBITDA 0 1 1 2
Results and discussion 8 EBITDA before capital items 0 1 1 2

Research objective 1: Describe how SENS 9 EBITDA excluding special items and
income from associates and joint
0 1 1 2

reports labelled earnings before interest, tax, ventures

depreciation and amortisation 10 EBITDA from continuing operations 1 0 0 1
11 EBITDA excluding once-off items 1 0 0 1
The first research objective was met by describing how 12 Headline EBITDA 1 0 0 1
SENS reports labelled EBITDA when discussing company 13 Operating EBITDA 0 0 1 1
performance. Table 3 lists the nature and frequency of the Total - 71 72 77 220
various EBITDA labels identified in the 220 SENS reports’ EBITDA, earnings before interest, tax, depreciation and amortisation.

Source: RCL Foods Limited, 2016, SENS report - Group financial results and cash dividend declaration for the 12 months ended 30 June 2016, IRESS Expert, Johannesburg. Authors’ emphasis.
FIGURE 3: Extract from RCL Foods Limited 2016 Stock Exchange News Service report – example of how earnings before interest, tax, depreciation and amortisation was defined.

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and calculating EBITDA in a manner consistent with the label The remaining 57 SENS reports identified from research
is addressed with research objectives 2 and 3 below. objective 1, that is, those that disclosed a modified EBITDA
label, also differed widely in how the modified EBITDA
Research objective 2: Identify how Stock measure was defined. Arguably, these SENS reports
Exchange News Service reports defined earnings facilitated a faithful representation by not only presenting a
before interest, tax, depreciation and label that informed users of additional adjustments (other
amortisation than ITDA-adjustments), but also by disclosing a definition
The purpose of the second objective was to identify how of how the measure was calculated. For the 57 SENS reports,
SENS reports defined EBITDA to assess the congruency 23 different definitions of the modified EBITDA measure
between the label and definition and to assess the diversity in were identified. Although it may be expected that the nature
how companies defined EBITDA. Figure 4 provides a link of companies’ expenses and transactions differ, such wide
between research objective 1 (modified or unmodified labels) diversity in definitions of modified EBITDA is surprising as
and research objective 2 (how the label was defined). the IASB has identified only limited number of adjusting
items (other than ITDA-adjustments) that companies
Of particular interest was the 163 SENS reports (74% of the routinely make (IASB 2016). In total, 50 different definitions
population) from research objective 1 that disclosed an of EBITDA, whether the label was presented as modified or
unmodified EBITDA label. When an unmodified EBITDA unmodified, were identified and are depicted in Table 4.
label was disclosed in a SENS report, users of the SENS report
may be inclined to assume that the only adjustments made in Panel A of Table 4 lists the 27 definitions pertaining to SENS
calculating EBITDA were ITDA-adjustments. Contrast this reports that disclosed an unmodified EBITDA label and
with a modified EBITDA label, for example, ‘EBITDA Panel B lists the 23 definitions pertaining to SENS reports
excluding once-off items’, which provides a clear indication that disclosed a modified EBITDA label. Although a further
that EBITDA is calculated not only by adjusting for ITDA- analysis of the types of and the reason for adjustments
adjustments, but also by making other adjustments. Figure 4 between EBITDA and IFRS earnings falls outside the scope of
shows that of the 163 SENS reports, 63 (29% of 220) SENS this study, the purpose of Table 4 is to illustrate the extent of
reports disclosed the standard definition of EBITDA (i.e. differences in the EBITDA-definitions. Sub-categories are
earnings before interest, tax, depreciation and amortisation), provided in both panels to reflect the extent to which EBITDA
48 (22% of 220) SENS reports disclosed no definition and used was defined in terms of ‘bottom-line earnings’, ‘operating
the acronym ‘EBITDA’ throughout the report and 52 (24% of profit or loss’ and ‘other terms’. As operating profit or loss is
220) SENS reports included definitions showing that undefined in IFRS, defining EBITDA in terms of operating
EBITDA was calculated not only as earnings before ITDA- profit or loss does not enhance its decision-usefulness.
adjustments, but also with other adjustments. Definitions
provided in these 52 reports varied widely, with 27 The diversity in definitions listed in Table 4 reaffirms
different definitions of EBITDA identified. This key finding concerns already raised about the lack of comparability of
highlights the risk of users assuming EBITDA to be a EBITDA between companies. Table 4 further shows that
standardised measure. many SENS reports defined EBITDA in terms of operating

How companies labelled EBITDA in their performance

How companies defined EBITDA used in the SENS reports
discussions in the SENS reports

63 (29%) Standard definion

provided

Unmodified No definion provided

48 (22%) (only the term ‘EBITDA’
EBITDA label
163 (74%) was used throughout)

Definion provided and

Populaon = 220 SENS indicated that
52 (24%)
reports for the period adjustments other than
2014 to 2016 ITDA were made 27 Number of
different
57 (26%) definions of
Definion provided and EBITDA (27+23=50)
Modified EBITDA label indicated that
57 (26%)
(see table 3 for list) adjustments other than
ITDA were made
23

EBITDA, earnings before interest, tax, depreciation and amortisation; ITDA, interest, tax, depreciation and amortisation; SENS, Stock Exchange News Service.
Note: All percentages expressed as a proportion of the total population of 220.
FIGURE 4: Summary of how companies labelled and defined earnings before interest, tax, depreciation and amortisation in their Stock Exchange News Service reports
from 2014 to 2016 (N = 220).

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TABLE 4a: List of non-standard definitions of earnings before interest, tax, depreciation and amortisation in Stock Exchange News Service reports from 2014 to 2016
(N = 220).
Number Panel A: Definitions of EBITDA as provided in the SENS reports in which an unmodified EBITDA label was disclosed
EBITDA defined in terms of bottom-line earnings
1 Earnings after Black Economic Empowerment (BEE) transactions but before interest, tax and depreciation.
2 Earnings before interest, impairments, tax, depreciation and amortisation.
3 Earnings before interest, tax and depreciation.
4 Earnings before interest, tax, depreciation and amortisation and adding back: Impairment or reversal of an impairment of an asset, fair value adjustments to financial
instruments, stock-based compensation, foreign exchange gains and losses and non-recurring transaction expenses or income.
5 Earnings before interest, tax, depreciation and amortisation and excluding foreign exchange movements.
6 Earnings before interest, tax, depreciation and amortisation and goodwill impairment losses.
7 Earnings before interest, tax, depreciation and amortisation and impairments of subsidiaries and includes a share in EBITDA before impairments in equity-accounted
investments.
8 Earnings before interest, tax, depreciation and amortisation excluding exceptional items and income from associates and joint ventures.
9 Earnings before interest, tax, depreciation and amortisation from core operations.
10 Earnings before interest, tax, depreciation and amortisation, fair value and impairment adjustments.
11 Earnings before interest, tax, depreciation and amortisation, impairments and before foreign exchange gains or losses.
12 Earnings before interest, tax, depreciation, amortisation and capital items.
13 Earnings before interest, tax, depreciation, amortisation, impairment of goodwill, net monetary gains and share of results of joint ventures and associates.
14 Earnings before tax, depreciation and amortisation.
EBITDA defined in terms of operating profit or loss
15 Net operating earnings before depreciation and amortisation.
16 Net operating income.
17 Operating earnings before interest, tax, depreciation and amortisation.
18 Operating profit or loss before depreciation and amortisation.
19 Operating profit or loss before depreciation, amortisation and capital items.
20 Operating profit or loss before depreciation, amortisation and impairment.
21 Operating profit or loss before depreciation, amortisation, impairment of goodwill, intangibles, property, plant and equipment.
22 Operating profit or loss before finance costs, depreciation and amortisation.
23 Operating profit or loss before interest, tax, depreciation and amortisation.
24 Operating profit or loss before interest, tax, depreciation and amortisation and including unrealised foreign exchange gain.
25 Operating profit or loss before interest, tax, depreciation and amortisation, impairment losses, unrealised foreign exchange differences on loans and equity-accounted
profits.
26 Operating profit or loss before interest, tax, depreciation, amortisation, impairment losses, foreign exchange differences and equity-accounted profit or losses.
27 Operating profit or loss before items listed below (Authors’ comment: This definition was shown as a line item in the income statement).
EBIDTA, earnings before interest, tax, depreciation and amortisation.

TABLE 4b: List of non-standard definitions of earnings before interest, tax, depreciation and amortisation in Stock Exchange News Service reports from 2014 to 2016 (N = 220).
Number Panel B: Definitions of EBITDA as provided in the SENS reports in which a modified EBITDA label was disclosed
EBITDA defined in terms of bottom-line earnings
1 Earnings after BEE charges but before interest, tax and depreciation.
2 Earnings before interest (net finance cost), taxation, depreciation, amortisation and special items.
3 Earnings before interest, tax, depreciation and amortisation adjusted for IFRS 2 charge, straightlining of lease and goodwill impairment.
4 Earnings before interest, tax, depreciation and amortisation and special items.
5 Earnings before interest, tax, depreciation and amortisation before special items and re-measurements.
6 Earnings before interest, tax, depreciation and amortisation before transaction costs.
7 Earnings before interest, tax, depreciation and amortisation excluding special items and income from associates and joint ventures.
8 Earnings before interest, tax, depreciation and amortisation, bargain purchase gain, impairments and loss on disposal of assets held for sale.
9 Earnings before interest, tax, depreciation, amortisation, impairments and loss on disposal of associate.
10 Profit for the period before income taxes, net finance income or (costs) including foreign exchange gains or (losses), depreciation of property, plant and equipment
including capitalised customer in-vehicle devices, amortisation of intangible assets including capitalised in-house development costs and intangible assets identified as part
of a business combination, share-based compensation costs, transaction costs arising from the acquisition of a business or investigating strategic alternatives, restructuring
costs, profits or (losses) on the disposal or impairments of assets or subsidiaries, insurance reimbursements relating to impaired assets and certain litigation costs.
EBITDA defined in terms of operating profit or loss
11 Operating profit or loss before depreciation, amortisation, special items and remeasurements.
12 Operating profit or loss before special items, depreciation and amortisation.
13 Operating profit or loss plus depreciation, amortisation of intangible assets, impairment of property, plant and equipment and excluding profit or loss and fair value
adjustments on the disposal of businesses, fair value adjustments, transaction costs and surpluses or deficits on retirement benefits.
EBITDA defined in terms of other references
14 Adjusted earnings before interest, tax, depreciation and amortisation.
15 Adjusted earnings before interest and tax (EBIT) is revenue less cost of goods sold and selling and administrative expenses plus share of income from associates and joint
ventures, dividend income and the attributable share of underlying Adjusted EBIT of certain associates and joint ventures and the discontinued Agricultural products
segment, excluding significant items. Adjusted EBITDA consists of Adjusted EBIT plus depreciation and amortisation.
16 Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortisation and adding back the following: Impairment or reversal of an impairment of an
asset, fair value adjustments to financial instruments, stock-based compensation, foreign exchange gains and losses and non-recurring transaction expenses or income.
17 Core earnings before interest, tax, depreciation and amortisation.
Table 4b continues on the next page →

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TABLE 4b (Continues...): List of non-standard definitions of earnings before interest, tax, depreciation and amortisation in Stock Exchange News Service reports from 2014
to 2016 (N = 220).
Number Panel B: Definitions of EBITDA as provided in the SENS reports in which a modified EBITDA label was disclosed
18 Normalised earnings before interest, tax, depreciation and amortisation.
19 Normalised earnings before interest, tax, depreciation excluding share-based payments, lease smoothing and transaction costs.
20 Trading operating profit or loss before depreciation and amortisation.
21 Underlying EBIT before depreciation, amortisation and impairments. Underlying EBITDA is reported before net finance costs and taxation benefit or
(expense),depreciation, amortisation and impairments related to equity-accounted investments and excludes exceptional items.
EBITDA defined in terms of other references
22 Underlying EBIT before depreciation and amortisation. Underlying EBIT is profit from continuing operations before interest, tax and earnings adjustments, including
impairments, but includes a share in equity-accounted interest and tax.
23 Underlying EBIT before depreciation, impairments and amortisation.
EBIDTA, earnings before interest, tax, depreciation and amortisation.

How companies labelled EBITDA in their performance

How companies defined EBITDA used in the SENS reports
discussions in the SENS reports

48(22%)
52(24%)
No definion of
EBITDA
EBITDA defined as
Unmodified 63 EBITDA defined as ‘earnings before
adjusng for
Populaon = 220 163 EBITDA label (29%) interest, tax, depreciaon and amorsaon'
other items (see
SENS reports for (74%)
panel A of Table 4)
the period
2014 to 2016
12 (5%)
57 43
(26%) (20%)
20 (9%) Only 10 (5%)
ITDA-adjustments
Modified EBITDA 5 (2%)
label

40 (18%)
Addional adjustments,
besides ITDA-adjustments

33(15%)

Insufficient informaon to determine

whether only ITDA-adjustments made

ITDA, interest, tax, depreciation and amortisation; EBITDA, earnings before interest, tax, depreciation and amortisation.
Note: All percentages expressed as a proportion of the total population of 220.
FIGURE 5: Discrepancies between how Stock Exchange News Service reports labelled, defined and calculated earnings before interest, tax, depreciation and amortisation
for the period 2014–2016 (N = 220).

income and not bottom-line earnings. This misrepresentation calculated EBITDA in a consistent manner. Figure 5 continues
of EBITDA detracts from faithfully representing the from Figure 4, links the findings from objectives 1 and 2 to the
measure, which is why the SEC prohibits US-listed findings from achieving objective 3 and highlights the
companies from reconciling EBITDA to operating profit discrepancies between how SENS reports labelled, defined
(SEC 2018). The results from achieving research objective 2 and calculated EBITDA in instances where an unmodified
not only point to a lack of comparability, but suggest that EBITDA label was disclosed.
EBITDA is not being faithfully represented, particularly
Figure 5 shows that of the 63 SENS reports that disclosed an
when SENS reports disclose an unmodified EBITDA label,
unmodified EBITDA label and provided the standard
but define EBITDA as adjusting for items other than ITDA-
definition of EBITDA, 43 (20% of the population) SENS
adjustments as well.
reports adjusted for items other than ITDA-adjustments.
The remaining 20 of 63 SENS reports (9% of the population)
Research objective 3: Recalculate earnings
made ITDA-adjustments only, consistent with the unmodified
before interest, tax, depreciation and
EBITDA label and definition.
amortisation based on the definition provided
in the SENS report Of the 52 SENS reports that disclosed an unmodified EBITDA
The third research objective was to recalculate EBITDA for label and disclosed a definition that indicated that EBITDA
SENS reports that disclosed an unmodified EBITDA label. In was adjusted for items other than ITDA-adjustments, 12 (5%
achieving the objective, an assessment could be made about of the population) did not adjust for the other items. This was
the extent to which these SENS reports labelled, defined and despite the additional adjustments being indicated in the

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 Page 11 of 13 Original Research

narrative definition and it shows that companies are Practical implications

inconsistent how they define and calculate EBITDA.
The results from this study show that the users of South
The last group of SENS reports in Figure 5 of particular African companies’ SENS reports should be wary of assuming
interest was the 48 of 163 SENS reports that disclosed an that EBITDA is a standardised, well-defined measure – in
unmodified EBITDA label, without disclosing any definition. other words, as a performance measure derived from IFRS
Five SENS reports lacked the information necessary to earnings by adjusting only for interest, tax, depreciation and
reconcile EBITDA to IFRS earnings and, thereby, determine amortisation. This finding has implications for investors,
whether ITDA-adjustments only were made. Thirty-three lenders and where executive compensation contracts are
(15% of the population) of the 48 SENS reports adjusted not based on EBITDA. Investors who use EBITDA as a valuation
only for ITDA-adjustments, but also other items. Upon tool should pay particular attention to the label, the definition
further scrutiny of the 33 SENS reports, it was found that applied to the label as well as the type of adjustments
16 disclosed a reconciliation that enabled a recalculation of companies make in calculating EBITDA. This is of particular
EBITDA. Therefore, although the unmodified EBITDA label concern for less-sophisticated users of financial reports
was not supported by any definition, the reconciliation when those users fixate on prominently displayed earnings
provided the information necessary to understand how the measurements and ignore other relevant information
EBITDA measure was calculated. Despite the reconciling elsewhere in the financial report (Johnson & Schwartz 2005;
information, users who fixate on the unmodified EBITDA Young 2014). Likewise, lenders who use EBITDA as a
label, without careful scrutiny of the SENS report, would performance measure in debt covenants should be careful to
mistakenly assume a standardised calculation. The remaining explicitly define EBITDA to enable effective monitoring.
17 (8% of the population) of the 33 SENS reports provided no Lastly, it may be necessary to explicitly define EBITDA where it
reconciliation. However, after also adjusting for impairment is used as a performance indicator in executive compensation
losses, profits or losses from the sale of assets, equity contracts.
accounted profits or losses, fair value adjustments on
The results from this study further suggest that existing JSE
financial instruments and foreign exchange gains or losses, it
reporting requirements are not explicit enough to ensure that
was possible to reconcile the EBITDA to the IFRS profit or
companies’ EBITDA disclosure exhibit a faithful representation
loss in 8 of the 17 SENS reports. This finding confirms that of
that facilitates decision-useful information. Whether the JSE’s
the IASB that companies regularly adjust for these items
(JSE 2019) proposed revision to its disclosure requirements on
when calculating EBITDA although they do not explicitly
non-GAAP earnings will be adequate to address the identified
state that they are doing so (IASB 2016). It should, however,
inconsistencies, is yet to be seen.
not be assumed that all companies adjust for these items.
Although the last 10 (5% of the population) out of the 48
The inconsistent manner between how EBITDA is labelled,
SENS reports adjusted for ITDA-adjustments only, consistent
defined and calculated makes it difficult, or arguably
with the measurement implied by the unmodified EBITDA
impossible to compare EBITDA between companies. The
label, five disclosed items such as impairment losses and fair
result further underscores the importance of requiring
value adjustments on financial instruments but did not
companies to disclose a detailed reconciliation between
adjust for it in EBITDA. For example, the 2016 SENS report of
EBITDA and IFRS earnings in order to ensure decision-useful
Tharisa Plc (2016) revealed that the company had incurred
information. This would be in line with the IASB’s disclosure
impairment losses and fair value adjustments on financial
initiative (IASB 2017a) as well as the proposed revision to the
instruments, but had not added these back when calculating
JSE’s disclosure requirements on non-GAAP earnings
EBITDA. Similarly, the 2015 SENS report of Omnia Holdings
(JSE 2019) to improve the quality of disclosure in financial
Limited (2015) showed that the company had a profit on
reports. Doing so will enable comparability and enhance the
disposal of assets as well as impairments losses, neither of
decision-usefulness of the EBITDA measure.
which was adjusted for in calculating the EBITDA amount as
disclosed.
Some stakeholders have requested the IASB to develop a
standardised definition of EBITDA (IASB 2017a). However, the
Collectively, the results from the third research objective
wide diversity found in how companies define EBITDA casts
show that the SENS reports of companies that present an
serious doubt of whether such a goal will ever be attainable.
unmodified EBITDA label, implying a standardised
Instead, the results provide support for the development of a
calculation, lack a faithful representation of EBITDA. This
disclosure requirement that mandates companies to disclose a
finding underscores the risk identified in other studies that
detailed reconciliation between IFRS earnings and EBITDA.
EBITDA, although presented as a standardised measure,
include other undisclosed adjustments (CFA Society United
Kingdom 2015). Although the IASB has identified some Limitations and recommendations
adjustments that companies routinely make in calculating Although this study showed that diversity exists in how
EBITDA, the results here show that companies are inconsistent companies label, define and calculate EBITDA, it did not
in whether those adjustments are taken into account. These assess whether users were confounded by the inconsistent
inconsistencies further hamper comparability of EBITDA. disclosure. Further research could shed light on how users,

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 Page 12 of 13 Original Research

particularly less-sophisticated users, react to the reporting Funding information

quality of EBITDA disclosure.
This research received no specific grant from any funding
agency in the public, commercial or not-for-profit sectors.
Caution should be taken to extend the findings to financial
reports other than SENS reports. This study only focussed on
SENS reports issued by JSE-listed companies. Such SENS Data availability statement
reports are not required to be audited and provide A summary of the coded data can be made available from the
management with more leeway in how EBITDA is disclosed. corresponding author upon request.
Whether the identified inconsistencies in EBITDA disclosure
exist in other financial reports (e.g. annual reports) remains
Disclaimer
open to further research.
The views and opinions expressed in this article are those of
Lastly, this study focussed on the role of EBITDA as a non- the authors and do not necessarily reflect the official position
GAAP earnings measure to convey information to users. of any affiliated agency of the authors.
Voluntary disclosure literature provides a contrary reason
for management to disclose non-GAAP earnings; that is, to References
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