EBITDA is important in stock valuation because it shows how much money a company makes from its main business, before taking out interest, taxes, and non-cash expenses. It helps investors understand the company’s actual operating performance. EBITDA is often used to compare companies in the same industry and to find out if a stock is overvalued or undervalued.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It shows how much profit a company makes from its regular business without including costs like loan interest, taxes, and long-term equipment wear and tear. It gives a clear picture of how well the business is running.

Why is EBITDA Important in Stock Analysis?

EBITDA helps investors see how much money a company is earning from its main work. It removes extra costs like interest and tax, which can change from company to company. So, it helps compare two companies easily. If a company has strong EBITDA, it means it is running its business well and can grow in future.

How is EBITDA Calculated?

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization. This formula adds back some costs to net profit to show the real earning from the business. Many companies also share EBITDA numbers in their financial reports to help investors understand their core performance.

How is EBITDA Used in Valuation?

Investors use EBITDA with valuation ratios like EV/EBITDA. This ratio compares a company’s enterprise value to its earnings. A lower EV/EBITDA means the company may be undervalued. This method is popular because it removes the impact of debt and taxes, and focuses only on how much profit the business is generating.

How Does EBITDA Help in Comparing Companies?

EBITDA makes it easier to compare companies in the same sector. Some companies may pay more tax or have more loans. EBITDA removes these differences and shows pure business performance. It is very useful for comparing companies in capital-heavy industries like telecom, power, and manufacturing.

What Are the Limitations of EBITDA?

EBITDA is useful, but it does not show all costs. It ignores interest, taxes, and depreciation, which are real expenses. So, you should not use EBITDA alone. Always check other things like net profit, free cash flow, and debt levels. This gives a full picture of a company’s financial health.