In our last post for investors I had discussed about EPS or earnings per share. You can read this post: What Is EPS? Earnings Per Share Importance For Investors. Now, the earnings season is approaching. In CNBC TV18 we everyday listen to a specific term. EBITDA. Now, what is EBITDA full form. Why is EBITDA margin so important for someone willing to invest in a companies share.
EBITDA full form stands for Earnings Before Interest Taxes Depreciation & Amortization. Its a different way for potential investors to evaluate a company that is it necesssarily making profits OR not. EBITDA calculation became popular during 1980s and during the dot com bubble. It was often used by companies who were selling any sort of items over the internet. So it might be used by a new company that is spending more money than it is making in a certain period.
Generally speaking EARNINGS = TURN OVER – EXPENSES over a certain period. This is single most important parameter to determine a stock’s price. Because its earnings which decide the future dividends and growth. But in EBITDA margin calculation we take into consideration expenses never happened. EBITDA is AN EARNING where its like a company has never paid interest OR taxes OR never depreciated OR amortization (lump sum debt allocation) happened. So basically EBITDA is an accounting gimic.