EBITDA, GAAP and Other Nonsensical Investing Abbreviations

Lou Carlozo

The Great Wall Street Abbreviation Dilemma -- a.k.a. TGWSAD -- boils down to a portfolio-sized paradox. In everyday life and work, capital letter shortcuts make proper names and sticky terminology easier to digest. No one uses National Aeronautics and Space Administration, for example: It's NASA.

Yet even a rocket scientist might be stumped by an earnings report acronym like EBITDA. What is it? Well, it's not the musical about the Argentina's first lady. You can't look it up on Apple's (AAPL) dictionary program, either (though NASA is easy enough to find). You can Google (GOOG, GOOGL) it, however, and here's what it means: "earnings before interest, taxes, depreciation and amortization." Got that?

Right now, your friendly neighborhood astronaut is calling up their accountant (who course goes by the abbreviation CPA) to find out exactly what the Sam Hill amortization is. Yet that's only helpful if the inquisitor can understand its correlation to depreciation. Without frustration.

"It's hard to get my mind wrapped around EBITDA even after 20 years as a trader," says Vic Patel, founder of Forex Training Group and a mentor to promising traders. "Sometimes I think Wall Street invents some of these esoteric types of acronyms on purpose, with the intention of intimidating would be self-directed investors into handing over management of their portfolios to their financial advisors. What else could be the answer to such madness?"

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It would be a fine thing to find a culprit in some parallel investment universe who's responsible for all this -- the same financial baron, no doubt, who hijacked one acronym when he created pesky user fees for the ATM.

But perhaps the answer is this: While there's no one to blame, everyone in investment plays the abbreviation game. So like it or not, it's a classic case of FAAHTS -- which, as you might have guessed, stands for "financial acronyms are here to stay."

Within this subset of financial jargon, we have quite a few initials to dig through before we understand the flow of corporate cash and quarterly earnings reports. The list stems from more popular ones such as ROI (return on investment) to the lesser-known NOI (net operating income).

But notice how the "OIs" in both acronyms don't mean the same thing at all. It's enough to make a confused investor make like an anguished punk rocker and yell "Oi!"

And some abbreviations appear deceptively easy, such as CCC. Anything with the same three initials in front of it sounds simple enough, until you consider that AAA (the top credit rating assigned to debt securities such as bonds) also stands for the American Automobile Association. What a strange trip, indeed.

Eventually, that means working our way to CCC, which stands for cash conversion cycle. So is that a movement toward turning dollars into yen or British pounds? Nope.

"The closer to zero or negative the CCC is, the better the company is run," says Richard Trimber, an attorney with General Counsel Law, based in McLean, Virginia. His specialties include mergers and acquisitions -- which, by the way, are also known as M&A.

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So what happens if CCC hits that elusive target? "Negative CCC means there is efficient use of working capital and efficient operations -- both signs of health -- and the less 'I' there is to add back in EBITDA," Trimber says.

All of this reveals what in many cases amounts to a gambit of abbreviation acrobatics. Or, you can compare it to one of those Russian doll sets shaped like a bowling pin: Open up an already confusing set of letters, and on the next level you'll find a term of jargon. And another. And...

"Take LIBOR for instance, a two-syllable phrase that stands for London interbank offered rate," says Angelo DeCandia, a professor of business and accounting at Touro College in New York. Being the plain-spoken authority he is -- but also one up for a bit of cheeky jargon payback -- DeCandia has created something he calls Quantitative Syllabic Test (QUANST) to measure how thorny an acronym is. And at eight syllables, he contends, LIBOR is a whopper.

If there's a taproot for all of this acronymity -- rhymes with infamy -- DeCandia believes it's the financial crisis of 2007-'08.

"It gave us CDS, or credit default swaps, which turned out to be the bad boy of all acronyms," DeCandia he says. "The brevity of this term nowhere near conveyed the toxicity of the instruments to which it referred. Perhaps that was the point."

Then there were other abbreviations from that era: CDO (collateralized debt obligation), CBO (collateralized bond obligation) and CLO (collateralized loan obligation), Based on the use of the word "collateralized," they all tip the scales "with a QUANST of five," DeCandia says.

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Yet if certain abbreviations can't be broken, at least some brokers can bend them. Says DeCandia: "I can't forget a colleague who, whenever faced with an EBITDA that clearly underscored bad performance, would say 'EBIT-DUH.'"



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