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You have completed Financial Statement Basics!
You have completed Financial Statement Basics!
Preview
Earnings Per Share ("EPS"), Price Earnings ("PE") multiples, and why some people focus on Net Income vs EBITDA and vice versa.
Further reading on different profit lines
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Earlier, I said we would revisit EBITDA
in the final stage of this course,
0:00
as it is a term that
investors tend to focus on.
0:04
Well, here we are.
0:07
[SOUND] Historically,
earnings per share, or EPS,
0:08
was a big number that investors tracked,
and it still is.
0:12
The way earnings per share is calculated
is based off of net income or net profit.
0:16
You take that number and divide it by
the total number of shares outstanding.
0:22
There are other things you may need to
take into account when calculating EPS,
0:26
for example, preferred dividends or
potential stock dilution.
0:31
But we're gonna skip over that,
as it's not a big deal for this lesson.
0:35
Remember, we're talking about
EBITDA versus net income, and
0:40
why some investor choose to focus
on different profit line items.
0:43
Net income can also impact
how a business is valued.
0:48
There are lots of ways
to value a business, and
0:52
we're not gonna cover them at
a great length in this course.
0:55
But just know that when people or
companies are looking at buying a business
0:58
or stock, they will likely look at a price
to earnings multiple, or PE multiple.
1:03
So if I bought a share for $10, and
1:10
the earnings per share of the business
was $1, then the PE multiple is ten.
1:12
There are a lot of things that one
needs to take into consideration
1:19
when valuing a business or
stock and deciding whether or
1:22
not is a good deal, or
if the purchase price is a good value.
1:25
All else equal, if this hypothetical
example business with a PE of ten
1:30
has been growing at the same rate for
ten years and
1:35
is expected with confidence to
continue growing at the same rate.
1:37
And for whatever reason, the PE multiple
has fluctuated between ten and 30 for
1:42
the past ten years, maybe buying at
a ten p multiple is a good deal.
1:46
EBITDA is another measure of profitability
that investors will scrutinize.
1:52
Just like a business may be valued
based on a price earnings multiple,
1:56
companies may also be valued
on a multiple of EBITDA.
2:00
EBITDA has gained in popularity with
the rise of private equity because
2:05
these firms often value
businesses based on EBITDA.
2:09
This is because EBITDA is
similar to free cash flow
2:14
in the sense that it shows the profit of
the business before taking into account
2:17
any issues related to capital structure.
2:22
Think of the financing section
of the cash flow statement.
2:25
It doesn't work as a true proxy to free
cash flow because it doesn't factor in
2:28
capital expenditures.
2:33
EBITDA is your earnings
before any interest payments,
2:34
which are related to debt, taxes,
which are related to the government,
2:38
and D and A,
which are non- cash expenses on the PNL.
2:43
In some cases where businesses
are very capital intensive and
2:47
you know you're going to have to commit
to capital expenditures that are material
2:51
each year, it makes more sense to
look at EBIT instead of EBITDA.
2:55
They focus on EBIT instead of EBITDA
because the DA in here is a proxy for
3:00
those capital expenditure needs.
3:06
This is admittedly touching on a broader
subject that can get complicated.
3:09
Regardless, I hope you see now how
the different measures of profit
3:14
can be used for different purposes.
3:18
This is a potential place
to continue your learning.
3:21
So I've shared some links in
the teacher's notes below.
3:23
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