EBITDA

The EBITDA or earnings before interest, taxes, depreciation, and amortization is used to measure a company’s profitability.

The formula looks like this

Revenue – Expenses (Except earnings before interest, taxes, depreciation, and amortization)

This figure gives us a simple version of profit and loss. How much did you make vs. how much did it cost you to make that. The problem is it excludes so many expenses that it does not act as a valid form of earnings.

Many companies will try to refer to EBITA as cash flow. It isn’t cash flow and should not be treated as such. Because it isn’t cash flow it is easy for a company to manipulate. So it should be used with many other indicators to determine if a company is a good buy.

Why Other Expenses are Important

A company can have a high EBITDA and yet be going bankrupt at the same time. It is best to take every expense that the company has into consideration and only look at how much money the company makes overall. This will give you a better estimate of how well a company will do after everything.

Other Financial Ratios

It is important to take other ratios into consideration when looking at the company. There are many different means to measure a company and by putting them all together you can get an idea of how well off a specific company is and how likely it is that they will last for the long term.

Texas Ratio - This is a ratio to tell how much stress a bank has on its finances

Levered Free Cash Flow – This tells you how much cash flow a company has after they have paid off their debts.

Return on Equity - This looks at how much money a company makes off of their equity