Ocado Group, a member of the FTSE 250, employs EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) as a central metric in their financial reports. The reporting period ending on 1 December 2024 (Fiscal Year 2024, FY24) saw the company posting an adjusted EBITDA of £153.3 million. This figure followed revenue in terms of importance among the reported financial measures. It reflects an uptrend from the FY23, marking an impressive increase of £101.7 million.
Yet, their adjusted loss before tax in FY24 amounted to a hefty £374.5 million. When juxtaposing this figure with the EBITDA, a staggering discrepancy of £527.8 million is noticed. The void between the two profitability measures can be accounted for by depreciation and amortisation (£460.3 million), net finance expenses (£82.3 million), and other gains (£14.8 million).
Notable investors, like Warren Buffett, have previously aired grievances regarding the use of EBITDA. In the 2017 Berkshire Hathaway shareholder gathering, Buffett labelled EBITDA as a ‘misleading statistic’ that holds potential for detrimental manipulation. He expressed disapproval for its failure to account for depreciation.
Echoing Buffett’s sentiments, Charlie Munger, his business partner, termed the use of EBITDA for business evaluation as a mark of a ‘disgusting nature’. In their view, excluding Interest, Tax, Depreciation and Amortisation inflates the valuation of a company. Nonetheless, securing a robust valuation has rarely been a hurdle for Ocado, given its current market capitalisation of £2.3 billion.
This significant market cap might raise eyebrows given the group’s post-tax loss status. However, it could be justified if crucial future potential is not mirrored in the current financial figures. Reflecting the positive aspects, their collaboration with Marks & Spencer has seen significant progress, making them the fastest-growing British grocer.
Still, it’s critical to note that food retail is known for its slender profit margins. In FY24, this division represented 85% of Ocado’s revenue but contributed a mere 29% to the EBITDA. It appears that the group’s prospective success relies on a vast expansion of the customer base using its advanced warehouse technology and innovative logistics solutions.
In term of numbers, to close the previously mentioned £527.8 million gap between the two cited profitability figures, the revenue from their technology solutions division – at the reported margin – should have been six times larger for FY24.
Analysts forecast gradual improvement in Ocado’s position over the next three fiscal years. However, by FY27, they predict a loss per share of 18.5p. Meanwhile, the average 12-month price target for Ocado shares among the analysts stands at 268p (ranging from 205p to 402p), which is a slight dip from the actual current share price.
Regardless, Ocado’s share price is known for its volatility. Therefore, it’s crucial to understand that these investments do carry considerable risk, and it is all part of the investing game.
From my personal standpoint, Ocado doesn’t encourage a convincing investment appeal. Aligning with Warren Buffett’s view, it seems more prudent to shift the focus towards post-tax earnings while performing stock analysis.
In line with that, I remain sceptical about Ocado’s ability to shift their numbers into positive territory in the short-term given their financial situation. Therefore, they eventually might need to rethink their strategies to steer into profitability.
To sum up, while Ocado’s venture with Marks & Spencer and their innovative technology are indeed promising, their financial reports indicate some unanswered questions about profitability. The significant discrepancy between EBITDA and post-tax loss and the scepticism surrounding the EBITDA as a measurement surely warrants further scrutiny.
Unlike the tech-focussed new-age stocks who make a case for a disconnect between current profitability and future potential, the realities of the grocery retail sector, being low margin, brings in a hard skepticism. This skepticism is accentuated in the case of Ocado, given the mammoth chasm between their EBITDA figure and the post-tax losses.
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