Writing on the wall: Ebitda provides a snapshot of a company's performance
5.9k Share this


INVESTING EXPLAINED: What you need to know about Ebitda, and why you should take it with a pinch of salt

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Ebitda. 

Eh? A bit of what? 

Ebitda is a frequently-used acronym standing for Earnings Before Interest Tax Depreciation and Amortisation. 

It is a measure of a company’s profit or earnings before taking off a list of deductions: interest on its debts, tax, the depreciation over time of its fixed assets like buildings, plant and machinery and the amortisation of its intangible assets. That is the decrease in the value of brands, patents and trademarks, also over a set time. 

Writing on the wall: Ebitda provides a snapshot of a company's performance

Writing on the wall: Ebitda provides a snapshot of a company’s performance

What does it tell us? 

Ebitda provides a snapshot of a company’s performance, including its cash flow, eliminating factors over which the business has little or no control like accounting policies and taxation. 

As a result it is a means of assessing the merits of similar companies in the same industry, although if you are thinking of buying shares, it is not an entirely reliable guide on its own.

How else can it be used? 

Many analysts favour the net debt-to-ebitda ratio because it provides an indication of the ability of a business to cut its debts. 

A ratio of more than 4 or 5 may suggest that reducing debt could be a struggle – and that the business is less likely to borrow in the future to expand. Analysts also like the enterprise value (EV)/ebitda ratio which shows how expensive a company is. 

A low EV/ebidta ratio suggests a company could be undervalued. 

To calculate the EV you take the company’s market capitalisation (the total value of its shares), add its debt, subtract its cash and divide it by the ebitda. 

When did it become popular? 

The term entered business language in the 1980s. But it was first devised in the 1970s by billionaire John Malone, now chairman of Liberty Media, owner of Virgin Media-02. During that period, Malone was rapidly acquiring cable TV companies and needed a measure of their cash-generating ability. 

Why is there criticism? 

Mab call ebitda a ‘bad number’ or even a ‘fake metric’ because the earnings figure may be distorted. Such is the length and complexity of companies’ financial statements that managers can easily bury issues relevant to earnings in the small print. As a result of this ploy, the number could be overstated. 

Are these criticisms fair? 

Ebitda has its limitations, so the main thing is to be aware of them. Never look at any single measure or ratio in isolation, but try to build a rounded picture of a company’s finances.   

Advertisement

5.9k Share this
You May Also Like

Bitcoin Returns To $30,000, Polkadot Leads Surge Among Major Cryptocurrencies

COIN360 After a turbulent week, cryptocurrencies are recovering some of the losses…

Sergio Aguero Statue Unveiled As Manchester City Honor All-Time Top Scorer

MANCHESTER, ENGLAND – MAY 13: (EXCLUSIVE COVERAGE) Manchester City unveil statue of…

STOCKS TO WATCH: Buzz around Audioboom

STOCKS TO WATCH: Buzz around Audioboom palpable since report suggested both Amazon…

How do you work out if companies are well run when stockpicking for your Isa?

A well-run company is likely to perform better and avoid errors and…

Ukraine’s Kalush Orchestra Celebrates Eurovision Win

Topline Ukrainian band Kalush Orchestra won the 2022 Eurovision Song Contest early…

Pennsylvania Senate Candidate Fetterman Hospitalized With Stroke—But Campaign ‘Isn’t Slowing Down’

Topline Pennsylvania Lt. Gov. John Fetterman—the frontrunner in his state’s Democratic U.S.…

A Housing Idea For Aging Parents Who Want Your Company And Their Privacy

By Chris Farrell, Next Avenue An exterior ADU design Into the Box…

ECB lays out ‘anonymous’ digital euro as public opposes ‘slavecoins’

The ECB released another working paper on the digital euro, providing an…