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Earlier, I said we would revisit EBITDA
in the final stage of this course,

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as it is a term that
investors tend to focus on.

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Well, here we are.

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[SOUND] Historically,
earnings per share, or EPS,

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was a big number that investors tracked,
and it still is.

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The way earnings per share is calculated
is based off of net income or net profit.

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You take that number and divide it by
the total number of shares outstanding.

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There are other things you may need to
take into account when calculating EPS,

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for example, preferred dividends or
potential stock dilution.

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But we're gonna skip over that,
as it's not a big deal for this lesson.

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Remember, we're talking about
EBITDA versus net income, and

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why some investor choose to focus
on different profit line items.

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Net income can also impact
how a business is valued.

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There are lots of ways
to value a business, and

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we're not gonna cover them at
a great length in this course.

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But just know that when people or
companies are looking at buying a business

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or stock, they will likely look at a price
to earnings multiple, or PE multiple.

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So if I bought a share for $10, and

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the earnings per share of the business
was $1, then the PE multiple is ten.

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There are a lot of things that one
needs to take into consideration

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when valuing a business or
stock and deciding whether or

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not is a good deal, or
if the purchase price is a good value.

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All else equal, if this hypothetical
example business with a PE of ten

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has been growing at the same rate for
ten years and

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is expected with confidence to
continue growing at the same rate.

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And for whatever reason, the PE multiple
has fluctuated between ten and 30 for

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the past ten years, maybe buying at
a ten p multiple is a good deal.

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EBITDA is another measure of profitability
that investors will scrutinize.

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Just like a business may be valued
based on a price earnings multiple,

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companies may also be valued
on a multiple of EBITDA.

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EBITDA has gained in popularity with
the rise of private equity because

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these firms often value
businesses based on EBITDA.

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This is because EBITDA is
similar to free cash flow

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in the sense that it shows the profit of
the business before taking into account

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any issues related to capital structure.

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Think of the financing section
of the cash flow statement.

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It doesn't work as a true proxy to free
cash flow because it doesn't factor in

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capital expenditures.

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EBITDA is your earnings
before any interest payments,

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which are related to debt, taxes,
which are related to the government,

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and D and A,
which are non- cash expenses on the PNL.

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In some cases where businesses
are very capital intensive and

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you know you're going to have to commit
to capital expenditures that are material

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each year, it makes more sense to
look at EBIT instead of EBITDA.

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They focus on EBIT instead of EBITDA
because the DA in here is a proxy for

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those capital expenditure needs.

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This is admittedly touching on a broader
subject that can get complicated.

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Regardless, I hope you see now how
the different measures of profit

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can be used for different purposes.

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This is a potential place
to continue your learning.

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So I've shared some links in
the teacher's notes below.