Hmmmm EBITDA has been quoted plenty over the last year and a bit. Didnt post this before but might as well now, past caring. Its basic stuff I know but scepticism and doubt is reqd when investing.
EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector — even when it isn't warranted.
A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability but not cash flow. EBITDA also leaves out the cash required to fundworking capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it is key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA. To learn more about other key investing concepts, sign up for our Investing Basics newsletter. BREAKING DOWN 'EBITDA to sales ratio'
In some sense, EBITDA can also be viewed as a liquidity measurement. Because a comparison is being made between the total revenue earned and the residual net income before certain expenses, EBITDA to sales ratio reports the total amount a company can expect to receive after operating costs have been paid. Although this is not a true sense of the concept of liquidity, the calculation still reveals how easy it is for a business to cover and pay for certain costs.
