EBITDA is very important in fundamental analysis because it shows how much profit a company is making from its main business operations. It removes interest, taxes, depreciation, and amortization from the earnings. This makes it easier to understand how strong the core business is, without the effect of other expenses. Investors use EBITDA to compare different companies, check profitability, and see if a company is doing well financially. It is a key number in finding good stocks for long-term investment.

What is EBITDA in Simple Terms?

EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization. It tells us how much profit a company is making from its main business activities, without including extra costs like bank interest, income tax, or asset depreciation. It helps to focus only on the profit made through actual business operations, like selling products or providing services. By removing the other costs, EBITDA gives a clean and simple way to judge how strong the business is.

Why is EBITDA Useful in Fundamental Analysis?

When we do fundamental analysis, we want to know if a company’s business model is working well or not. EBITDA is useful because it shows profit from only the business activity, without outside factors like debt, interest or tax. This helps us know if the company is running its business in a profitable way. It is especially helpful when comparing companies in the same industry, as it gives a fair way to see which business is performing better. Also, EBITDA helps to check cash flow and operating efficiency, which are important for long-term investors.

How is EBITDA Different from Net Profit?

Net profit is the final amount left after subtracting all expenses, including interest, taxes, depreciation, salaries, rent, etc. But EBITDA removes interest, tax, depreciation and amortization, and focuses only on the main business performance. Net profit can sometimes be low even if the business is doing well, because of high tax or loan payments. But EBITDA shows the real earning power of the core business. So, while net profit tells us about total earnings, EBITDA gives a cleaner picture of business efficiency.

How Does EBITDA Help in Comparing Companies?

EBITDA is very helpful when you want to compare companies in the same industry. Some companies may have more debt, while others may get tax benefits. These things can affect their net profit. But EBITDA removes these differences and shows how much profit they make from their main work. This gives a fair base to compare. For example, if two companies are in the same sector but one has better EBITDA, it may be managing its operations more efficiently.

What is EV/EBITDA Ratio and Why is it Important?

EV/EBITDA is a popular ratio used to value a company. EV means Enterprise Value, which includes market cap and debt. When you divide EV by EBITDA, you get a number that tells whether the company is overvalued or undervalued. A lower EV/EBITDA ratio means the stock may be cheap, while a higher number may show it is expensive. This ratio is very useful in fundamental analysis because it gives a clear picture of the company’s value in relation to its earnings from business operations.

What Are the Limitations of EBITDA?

While EBITDA is useful, it has some limitations. It does not include important costs like interest on loans, taxes paid to the government, and wear and tear of machines or buildings. So, a company with high EBITDA but huge debt can still be risky. Also, EBITDA can be misused to show a better picture than reality. That’s why you should always use EBITDA with other financial tools like net profit, debt-to-equity ratio, and free cash flow to get the full picture of a company’s financial health.