{"id":9147,"date":"2022-04-14T09:40:00","date_gmt":"2022-04-14T06:40:00","guid":{"rendered":"https:\/\/www.robomarkets.com\/blog\/?p=9147"},"modified":"2023-10-12T11:54:11","modified_gmt":"2023-10-12T08:54:11","slug":"multipliers-for-stock-analysis-reviewing-ebitda","status":"publish","type":"post","link":"https:\/\/www.robomarkets.com.cy\/blog\/investing\/multipliers-for-stock-analysis-reviewing-ebitda\/","title":{"rendered":"Multipliers for Stock Analysis: Reviewing Ebitda"},"content":{"rendered":"\n

In our previous articles, we’ve discussed several stock market ratios such as P\/S<\/a>, P\/CF<\/a>, ROI<\/a>, ROE<\/a>, and the ways they are calculated. This time, we’ll get acquainted with another one called Ebitda. Just like other multipliers, Ebitda provides insight into the finances of a company based on its performance.<\/p>\n\n\n\n

<\/span>The Ebitda ratio – what is it?<\/span><\/h2>\n\n\n\n

Ebitda means “Earnings before interest, taxes, depreciation, and amortisation”<\/strong>. Basically, it’s the money earned by a company before all expenses. This ratio, which was created in the eighties, is still being used today as it can be applied for assessing the financial capabilities of business entities.<\/p>\n\n\n\n

Large companies and corporations with massive expenses and assets that have been depreciating for a long time find it very favourable for interested parties to focus on the Ebitda coefficient. It's a way to make their companies more attractive to investors. And vice versa – small companies with minor expenses and assets prefer not to show their Ebitda ratio, as it can damage their investment appeal.<\/p>\n\n\n\n

Quite often, Ebitda is coupled with a similar ratio called Ebit, although they are calculated in different ways. Ebit implies “Earnings before interest and taxes”.<\/p>\n\n\n\n

<\/span>What does Ebitda tell us?<\/span><\/h2>\n\n\n\n
    \n
  1. The efficiency of the company’s performance in comparison with its competitors in the industry. Just like many other ratios, there is no point in comparing companies from different sectors.<\/li>\n\n\n\n
  2. The business profitability. Is investing money in this particular company worth it, and what profit expectations does it offer?<\/li>\n\n\n\n
  3. The profit expectations for paying expenses, amortisation, and taxes. Can the company afford to pay all the above-mentioned, and what profit will it have in the end?<\/li>\n<\/ol>\n\n\n\n

    <\/span><\/a>Advantages and disadvantages of the Ebitda ratio<\/span><\/h2>\n\n\n\n

    <\/a>Advantages:<\/h4>\n\n\n\n
      \n
    1. It’s more accurate than other ratios in determining the volume of money, as it takes amortisation into consideration.<\/li>\n\n\n\n
    2. It allows comparing companies with different tax deduction levels, capital structures, and amortisation indicators.<\/li>\n\n\n\n
    3. It compares profits before taxes and amortisation. Based on them, we can conclude which company is better at optimising its expenses.<\/li>\n<\/ol>\n\n\n\n

      <\/a>Disadvantages:<\/h4>\n\n\n\n
        \n
      1. There is no single calculation method. Calculations made for different companies might vary considerably, hence the comparison can be inaccurate<\/li>\n\n\n\n
      2. It doesn’t take into account the changes in the company’s working capital, which leads to an incorrect volume of money that is usually overestimated.<\/li>\n\n\n\n
      3. In the case of neglected capital expenses, it misinterprets the company’s actual capabilities to repay its debts.<\/li>\n\n\n\n
      4. The company’s accounting policy has a direct influence on the Ebitda coefficient.<\/li>\n<\/ol>\n\n\n\n

        <\/span><\/a>How Ebitda is calculated<\/span><\/h2>\n\n\n\n

        The two most popular methods to calculate Ebitda are:<\/p>\n\n\n\n

        Ebitda top-down = Revenue - Costs of goods (not including amortisation) + Operating expenses<\/strong><\/p>\n\n\n\n

        Where:<\/p>\n\n\n\n