EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization and so from the definition itself we can understand that its basically an operating income before Depreciation and Amortization and its a measure of operating cash flow.
Positives of EBITDA
EBITDA can be used to analyze the profitability between companies and industries in different sectors and operations because it eliminates the impact of financing and accounting decisions.
Negatives of EBITDA
EBITDA is good metric to evaluate profitability, but not cash flow which means Good EBITDA means good business model but it does not accurately reflect a firm’s ability to generate cash and so it should not only be used for investing decisions.
Simple Example
Bharti Airtel
Q409 - 40.7%
Q309 - 41%
Infosys
Q409 – 33.6%
Q309 – 35.1%
From the above data you can conclude that why Infosys is at 15 times FY09 Earnings and Bharti Airtel is close to 20 times FY09 Earnings. Remember this is not conclusive evidence of high PE but could be one of the many reasons
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