Guide to Analysing Companies


Earnings before interest, taxes, depreciation and amortisation


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FINANCE Essencial finance

Earnings before interest, taxes, depreciation and amortisation
A measure of a company’s financial performance (arrived at by
taking income minus expenses, excluding tax, interest, de-
preciation and amortisation). ebitda, as it is usually known,
came into favour during the 1980s when bankers supporting
leveraged buy-outs needed a measure that showed a
company’s ability to service its debt. Because it eliminates the
effects of financing and depreciation, ebitda can be a useful
way of comparing companies in different industries. Hence
ebitda’s popularity during the internet boom, when investors
used it to compare the performance of technology companies in
different industries or sectors. Because it is relatively easy to cal-
culate, ebitda is too often used instead of measures relying on
operating cash flow. It can be dangerous to rely too heavily
on ebitda and ignore changes in a company’s working capital.
Earnings per share
A measure of the total return earned by a company on its
ordinary share capital: the net profit of the company
divided by the number of ordinary shares in issue. Net profit is
the gross profit (receipts minus costs) less interest charges,
depreciation, payments to holders of preference shares
and tax. A company that makes a net profit of $10m and has
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02 Essential Finance 10/11/06 2:22 PM Page 115


2m shares outstanding has earnings per share (eps) of $5. eps
is a helpful guide to a company’s past, present and future
performance.
EASDAQ
See nasdaq europe.
EBITDA
See earnings before interest, taxes, depreciation
and amortisation.
E-commerce
Commerce that is carried out electronically, particularly via the
internet. Although consumers and businesses liked the idea of e-
commerce, its development was restrained by the difficulty of
finding secure methods of payment on the internet. It took time
to convince consumers that their credit-card details would
not become accessible to any casual hacker after they had
keyed them into an order form on a website. The hype that ac-
companied the internet boom, when companies offering virtu-
ally anything online were feted by investors, has given way to
more sober times. Companies with marginal businesses have
collapsed and many of the survivors have merged. Many of the
companies that have benefited most from e-commerce are small
firms with a niche idea that have suddenly found an inter-
national market for their product or service. Some of the most
successful ways of using the internet are hidden from public
view. For example, suppliers of spare parts for airlines or car
companies now find they can move millions of products at the
touch of a button; these exchanges connect business to business.

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