Understanding company financial statements: EBITDA

Julie Brownlee, Fsp Invest, 27 Nov. 2015

Tags: ebitda, what is ebitda, company financial statements, measuring performance, free cash flow, profits

When you invest in a company, thorough research forms of vital part of picking the shares you want to invest in.

One thing that you can’t ignore is a company’s financial statements. Companies publish these for the first half of their financial year (interim statements) and for their full financial year (final statements).

A commonly quoted figure from these accounts is EBITDA.

So what is EBITDA? And how can you use it?

Read on to find out…

What is EBITDA?

EBITDA is the abbreviation of earnings before interest, tax, depreciation and amortisation.

It’s basically a company’s earnings before it takes any deductions off.

EBITDA can be a useful way of comparing the performance and valuation of two different companies.

If you compare earnings (or profits) after deductions, figures can appear skewed as they may have different policies on the depreciation of assets, different debt levels and pay different tax rates.

The fact EBITDA ignores deductions is useful, but this is also a downside of using the figure.

The problems with EBITDA

When considering the profits a company makes, as an investor you’re interested in what the company can pay out to investors, not how much money it makes before it has to settle all its dues.

This is where EBITDA isn’t great.

If you want to compare different companies to see how they’re performing, you should take a look at their free cash flow. Free cash flow shows you the money a company is actually making.

For instance, when a company has a lot of free cash flow, it’s more likely to continue paying dividends to its shareholders.

So there you have it. Understanding what EBITDA is from a company’s financial statements.

*********** Advertisement ************

These Five shares are Set to Rocket in 2015

Get all the details here in this free report


Related QA

kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer
rickey101ter asked:
Good day gentlemen I am a subscriber of various of your products e.g. the above mentioned two and TWS, but I am not happy with the services I [read more]
Published at 07 Feb. 2018 in: Investing Investing 2 answers
bongani.zwane.127 asked:
Hi Francois, I want to invest in ETF for my kids educational funds. I would like to find out which ETF securities can I invest into for a period [read more]
Published at 01 Feb. 2018 in: Investing 1 Answer

Related articles:




Youtube Twitter Facebook

Connect with us:    

  • Accelerated Investor
  • Accessories
  • Accountancy
  • Accountancy services