EBITDA explained: importance in business analysis 2024

In 2024, EBITDA remains a key financial metric for businesses and investors. This article looks into what EBITDA is, its meaning, and why it's an essential tool in evaluating company performance and financial health.

What is EBITDA?

If you’re interested in CFD trading, you need to carry out an analytical process. Understanding the markets and the companies that are trading on them is key to be able to navigate the markets. The financial position of any company whose stocks and shares you’re planning to trade is vital information for investors, and this is where EBITDA comes into play.

EBITDA is often referenced by financial professionals when they’re discussing the valuation of companies and businesses’ overall success. So what is meant by EBITDA, how is it calculated, and why does it matter?

EBITDA Examples In Practice

Let’s take a look at four companies trading on the markets today to see how their EBITDA varies:

First, let’s take a look at AMC. In this year alone, its EBITDA has ranged between $-80 million and $68 million, while Xpeng has seen an increase in its EBITDA of almost 40% during the last quarter of 2022, but it is still well into negative figures, meaning that cash flow may be a significant issue for this company.

Nio, too, is still in negative figures at $-0.544 billion as of September 2022, although this represents an increase of 253.43% year on year. Tesla on the other hand, sees a healthy EBITDA of $4.644 billion during the last quarter of 2022, and represents a great, stable choice for investors.

Other Key Indicators For Analysing Shares

Some other key indicators that you should use for analysing shares include:

Fundamental Analysis vs. Technical Analysis

Both fundamental analysis and technical analysis are relevant when analysing the markets. While technical analysis examines a security’s price movement then uses the data to predict its future price movement, fundamental analysis looks at financial and economic factors influencing the business.

If you’re a short-term trader, these tools aren’t especially important. However, they matter considerably if you’re considering holding a position for the long-term.

How can EBITDA be used as a trader?

For most traders, focusing on EBITDA and other financial metrics like net income and revenue isn’t their top priority. But there are a few ways the metric can be used if you’re investing in stocks and shares.

The first thing to do is examine a company’s EBITDA growth. Is it rising? And if so, at what rate? If companies are seeing good EBITDA growth over time, they’re worth investing in.

You can also use EBITDA in order to determine if a company has been undervalued or overvalued. The EV to EBITDA metric allows you to examine the company’s enterprise value against its EBITDA. If the answer is a low number, the company may well be overvalued.

FAQs

1. What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a financial metric used to assess a company's operating performance by focusing on its profitability from core business operations, without the impact of financing decisions, accounting methods, or tax environments.

2. How is EBITDA calculated?

EBITDA is calculated by taking a company's net income and adding back interest, taxes, depreciation, and amortization expenses. This formula provides a clearer picture of operational profitability by removing expenses that can vary widely between companies.

3. Why is EBITDA important for investors and analysts?

EBITDA is important because it provides a standardized measure of a company's core profitability, making it easier to compare performance across different companies and industries. It's particularly useful in assessing companies with large amounts of fixed assets or significant debt.

4. Can EBITDA be misleading?

While EBITDA is a useful tool, it can be misleading if used in isolation. It doesn't account for capital expenditures, changes in working capital, or debt repayment, which are crucial for understanding a company's financial health. Therefore, it should be used alongside other financial metrics.

5. How does EBITDA differ from operating income?

Operating income, or operating profit, is calculated as gross profit minus operating expenses, including depreciation and amortization. EBITDA, on the other hand, adds these expenses back to net income. Thus, EBITDA is typically higher than operating income.

6. Is EBITDA used in valuation?

Yes, EBITDA is often used in business valuation. The EBITDA multiple, which compares a company's value to its EBITDA, is a common valuation metric, especially in mergers and acquisitions. It helps investors determine how long it would take to recoup their investment.