EBITDA measures a company's core operational profitability by adding back interest, taxes, depreciation, and amortization to net income, serving as a proxy for operational cash generation. Cash profit (or operating cash flow) is the actual cash generated, accounting for working capital changes, taxes, and interest payments, providing a more accurate view of liquidity.
EBITDA Excludes Actual Interest and Tax Payments Cash Profit Reflects Them. EBITDA is calculated before interest and tax. So even if you paid ₹2 lakhs in interest or ₹1.5 lakhs in taxes, EBITDA won't show that. But Operating Cash Profit includes those outflows.
EBITDA is a measure of operational profitability, while Cash EBITDA is a measure of cash flow. Therefore, a company could have a high EBITDA but low Cash EBITDA if it's profitable on paper but has poor cash flow.
According to Buffett, EBITDA is not reflective of a company's true financial performance due to neglecting capital expenditures (Capex) and changes in working capital, among various other issues.
EBITDA and gross profit measure profit in different ways. Gross profit is the profit a company makes after subtracting the costs associated with making its products or providing its services, while EBITDA shows earnings before interest, taxes, depreciation, and amortization.
Companies often prioritize EBITDA over net income, as it paints a more flattering picture of the company's profitability. Thus, investors must be vigilant if a company abruptly starts to focus on EBITDA, especially if there are crucial issues like rising debt or escalating capital costs.
A 2019 study by Harvard Business Review found either Vanguard, BlackRock or State Street is the largest listed owner of 88% of S&P 500 companies. There is a perception that a few select companies own a vast majority of the stock market.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric showing a company's operating profitability by adding back non-operating expenses (Interest, Taxes) and non-cash expenses (Depreciation, Amortization) to net income, offering a clearer view of cash flow and making it easier to compare companies with different capital structures or tax situations, but it's not a perfect measure as it ignores real costs like asset wear-and-tear. Think of it as a simplified "scorecard" of core business performance before financing, taxes, and accounting entries.
EBITDA – The primary measure of cash flow used to value mid to large-sized businesses and does not include the owner's salary as an adjustment.
The Rule of 40 combines a company's revenue growth and profitability into a straightforward calculation: the total of your growth rate and EBITDA profit margin should equal or exceed 40%. This rule helps SaaS companies balance rapid expansion and financial stability, ensuring long-term sustainability.
To move from EBITDA to FCF, factor in all the items that affect FCF but not EBITDA: FCF = EBITDA – Net Interest Expense – Taxes +/- Other Non-Cash Adjustments +/- Change in Working Capital – CapEx.
The EBITDA ratio varies by industry, but as a general guideline, an EBITDA value below 10 is commonly interpreted as healthy and above average by analysts and investors.
Critics argue that EBITDA can be manipulated, making companies appear stronger than they are. Unlike operating cash flow, EBITDA excludes changes in working capital, potentially hiding financial troubles. While useful, EBITDA should not replace comprehensive measures of a company's cash generation.
The "24-year-old trader making $8 million" refers primarily to Jack Kellogg, a successful day trader who reported over $8 million in gains from trading in 2020 and 2021, starting with just $7,500 and leveraging key indicators like VWAP, support/resistance, volume, and linear regression for simple, adaptable strategies. His story highlights achieving significant returns by weathering different market conditions, learning from losses, and sticking to core principles rather than overcomplicating things.
The 3-5-7 rule in stock trading is a risk management strategy: risk no more than 3% of capital on a single trade, keep total open position risk under 5%, and aim for a minimum 7% profit target or 7:1 reward-to-risk ratio, ensuring capital preservation and disciplined growth by setting clear limits and avoiding emotional decisions.
Cons of using EBITDA for business valuation:
EBITDA is not an exact snapshot of cashflow from operations, as it does not account for changes in working capital. Also, it includes certain non-cash expenses, such as stock option compensation and bad debt expense. EBITDA ignores cash outlays for capital expenditures.
A DTI ratio of 35% or less shows you're managing your debt well. This range may increase your chances of getting loans with competitive rates. It also means you likely have money left over for saving and unexpected expenses. If your DTI ratio falls between 36% and 41%, you may still be in good shape.