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EBITDA

In the world of investing and trading in the stock market, accurately gauging the financial health of a company is very important. Estimating the profitability and financial health is a key factor of picking the right stocks to invest in.

One of these factors is called EBITDA and this stands for Earnings Before Interest, Tax, Depreciation and Amortization.

In order to calculate the EBITDA you will need all those numbers, but thankfully almost every company that is listed on a stock market provides investors with a balance sheet. On this balance sheet EBITDA is noted so there is no need to calculate this on your own.

Nevertheless we will explain to you how this formula works and this is very straight forward.

EBITDA = Revenue – Expenses (excluding the interest, taxes, depreciation and amortization)

The comparison of profits from different companies can be made very clear this way, and this helps a lot with making an informed investment. Tracking the EBITDA numbers over a longer period of time can also give a clear profit trend line and eliminates some of the noise created by external factors.

The downsides of using EBITDA

By scraping of all the taxes, interest and so forth, EBITDA can give the appearance of a profitable company. But this company could be losing money when you factor in all the other deductions. This is why you should never make a trading decision on EBITDA alone. Always take a look at other fundamental numbers to make sure the company is in good financial health.