1 00:00:00,540 --> 00:00:04,740 Earlier, I said we would revisit EBITDA in the final stage of this course, 2 00:00:04,740 --> 00:00:07,860 as it is a term that investors tend to focus on. 3 00:00:07,860 --> 00:00:08,715 Well, here we are. 4 00:00:08,715 --> 00:00:12,421 [SOUND] Historically, earnings per share, or EPS, 5 00:00:12,421 --> 00:00:16,560 was a big number that investors tracked, and it still is. 6 00:00:16,560 --> 00:00:22,300 The way earnings per share is calculated is based off of net income or net profit. 7 00:00:22,300 --> 00:00:26,940 You take that number and divide it by the total number of shares outstanding. 8 00:00:26,940 --> 00:00:31,510 There are other things you may need to take into account when calculating EPS, 9 00:00:31,510 --> 00:00:35,700 for example, preferred dividends or potential stock dilution. 10 00:00:35,700 --> 00:00:38,920 But we're gonna skip over that, as it's not a big deal for this lesson. 11 00:00:40,010 --> 00:00:43,850 Remember, we're talking about EBITDA versus net income, and 12 00:00:43,850 --> 00:00:47,560 why some investor choose to focus on different profit line items. 13 00:00:48,880 --> 00:00:52,470 Net income can also impact how a business is valued. 14 00:00:52,470 --> 00:00:55,410 There are lots of ways to value a business, and 15 00:00:55,410 --> 00:00:58,770 we're not gonna cover them at a great length in this course. 16 00:00:58,770 --> 00:01:03,300 But just know that when people or companies are looking at buying a business 17 00:01:03,300 --> 00:01:10,380 or stock, they will likely look at a price to earnings multiple, or PE multiple. 18 00:01:10,380 --> 00:01:12,984 So if I bought a share for \$10, and 19 00:01:12,984 --> 00:01:18,450 the earnings per share of the business was \$1, then the PE multiple is ten. 20 00:01:19,600 --> 00:01:22,910 There are a lot of things that one needs to take into consideration 21 00:01:22,910 --> 00:01:25,760 when valuing a business or stock and deciding whether or 22 00:01:25,760 --> 00:01:30,250 not is a good deal, or if the purchase price is a good value. 23 00:01:30,250 --> 00:01:35,020 All else equal, if this hypothetical example business with a PE of ten 24 00:01:35,020 --> 00:01:37,800 has been growing at the same rate for ten years and 25 00:01:37,800 --> 00:01:42,070 is expected with confidence to continue growing at the same rate. 26 00:01:42,070 --> 00:01:46,130 And for whatever reason, the PE multiple has fluctuated between ten and 30 for 27 00:01:46,130 --> 00:01:51,060 the past ten years, maybe buying at a ten p multiple is a good deal. 28 00:01:52,095 --> 00:01:56,780 EBITDA is another measure of profitability that investors will scrutinize. 29 00:01:56,780 --> 00:02:00,780 Just like a business may be valued based on a price earnings multiple, 30 00:02:00,780 --> 00:02:04,020 companies may also be valued on a multiple of EBITDA. 31 00:02:05,150 --> 00:02:09,855 EBITDA has gained in popularity with the rise of private equity because 32 00:02:09,855 --> 00:02:14,285 these firms often value businesses based on EBITDA. 33 00:02:14,285 --> 00:02:17,355 This is because EBITDA is similar to free cash flow 34 00:02:17,355 --> 00:02:22,115 in the sense that it shows the profit of the business before taking into account 35 00:02:22,115 --> 00:02:24,365 any issues related to capital structure. 36 00:02:25,385 --> 00:02:28,850 Think of the financing section of the cash flow statement. 37 00:02:28,850 --> 00:02:33,152 It doesn't work as a true proxy to free cash flow because it doesn't factor in 38 00:02:33,152 --> 00:02:34,549 capital expenditures. 39 00:02:34,549 --> 00:02:38,526 EBITDA is your earnings before any interest payments, 40 00:02:38,526 --> 00:02:43,773 which are related to debt, taxes, which are related to the government, 41 00:02:43,773 --> 00:02:47,620 and D and A, which are non- cash expenses on the PNL. 42 00:02:47,620 --> 00:02:51,770 In some cases where businesses are very capital intensive and 43 00:02:51,770 --> 00:02:55,650 you know you're going to have to commit to capital expenditures that are material 44 00:02:55,650 --> 00:02:59,770 each year, it makes more sense to look at EBIT instead of EBITDA. 45 00:03:00,840 --> 00:03:06,570 They focus on EBIT instead of EBITDA because the DA in here is a proxy for 46 00:03:06,570 --> 00:03:08,430 those capital expenditure needs. 47 00:03:09,790 --> 00:03:14,400 This is admittedly touching on a broader subject that can get complicated. 48 00:03:14,400 --> 00:03:18,490 Regardless, I hope you see now how the different measures of profit 49 00:03:18,490 --> 00:03:21,100 can be used for different purposes. 50 00:03:21,100 --> 00:03:23,730 This is a potential place to continue your learning. 51 00:03:23,730 --> 00:03:26,240 So I've shared some links in the teacher's notes below.