What is EBITDA and How it is Important?
EBITDA full form is Earnings before interest, taxes, depreciation and amortization. It is a measure of a company's cash flow before certain deductions.
There are a few factors that the EBITDA neglects. These include the money required for working capital, fixed expenses and other debt payments and capital expenditures. In every business, capital expenditures are a crucial, ongoing expense. However, this is not factored into the EBITDA figure, so investors need to be wary when using the EBITDA figure as a basis for a profit margin.
EBITDA gives the investor an idea of how much money the company has made before its deductions. It is especially useful for a new company who has just started business and has not yet been hit with taxes, payments to creditors, and so on.

If the EBITDA figure seems to have a good growth rate, then some investors may use this figure instead of the overall net figure. It can show them that the company has a future for potential growth and that they will get a return on their investment. Investors call this looking at the EBITDA margin rather than the net margin.

There are potential problems in using the EDITDA figure. The EBITDA leaves out of lot of expenses in the final figure, so it may not be a realistic view of a company’s profitability. It also does not measure the actual cash that is flowing into the company because of the figures that it leaves out.
Serving Since 2007
Custom Search
Welcome to Indian Share Market
First Learn and then Earn
Earning money in share maket  requires appropriate knowledge and experience, so it is highly advisable to gain adequate knowledge before start trading and investing in share market.
There are more reliable ways for investors to calculate a company's cash income. They can use the Free Cash Flow (FCF) system. The FCF is calculated by simply deducting capital expenditures from the business cash flow figure. This takes into account at least three of the factors that the EBITDA leaves out: inventory, receivables and capital expenditures such as property and equipment.

FCF is not an ideal solution, since it does not figure in the expenditure of debt. Also, a lot of companies, when first formed, are in a negative cash flow situation for many years while the company builds. The FCF may be a viable and more reliable figure for an investor to use than EBITDA.
The information provided on this website is for educational purpose and not to be considered as investing or trading advice.
The investment and trading has to be done on sole discretion and www.daytradingshares.com or any person related to this site Should not be held responsible for the outcome.
Copyright © 2007-2017, www.daytradingshares.com. All Rights Reserved.
What is the Full form of EBITDA
How important is EBITDA
It allows investors to see how much money a company is making before taxes, depreciation and amortization have been deducted. Basically, when investors place money in a company, they will want to know how much money the company has been making since their money was invested.
Definition of EBITDA
Formula to Calculate EBITDA
The EBITDA formula is calculated by subtracting all expenses except interest, taxes, depreciation, and amortization from net income.
Calculating EBITDA is usually a fairly simple process and, in most cases, requires only the information on a company's income statement and/or cash flow statement.

Note that caution should be taken when using EBITDA as a measure of a company's overall financial health - its use as such is somewhat controversial
Here are five main components to the EBITDA equation.

Earnings -
The acronym uses the word earnings, but it really means net profit or simply net income. This is the bottom line profit for the company found at the bottom of the income statement.

Taxes - Tax expense changes from year to year and business to business. This often depends on the industry, location, and size of the company. This figure is usually found in the non-operating expenses section of the income statement.

Interest Expense - As with taxes, interest expense varies among companies and across industries. Some more capital intensive industries are more likely to have more interest expenses on their income statement than companies in less capital intensive industries. This expense is also found in the non-operating expense section.

Depreciation and Amortization - These expenses appear in the operating expense section of the income statement to allocate the cost of a capital asset during the period and record its use.
What is EBITDA Margin
The EBITDA margin takes the basic profitability formula and turns it into a financial ratio that can be used to compare all different sized companies across and industry.

The EBITDA margin formula divides the basic earnings before interest, taxes, depreciation, and amortization equation by the total revenues of the company- thus, calculating the earnings left over after all operating expenses (excluding interest, taxes, dep, and amort) are paid as a percentage of total revenue.

Using this formula a large company like Reliance could be compared to a new start up