What Do EBITDA and Target Estimate Mean?

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EBITDA, target estimate: Could you define these terms? -- N.M.

OK, let's start with the first one, EBITDA, a commonly used term in stock financial analysis, which stands for earnings before interest, taxes, depreciation and amortization. Different readers will have a varying level of understanding when it comes to EBITDA, so forgive me if I stick with the basics, for the benefit of beginners.

As investors, the most important feature that we look for in a company is earnings, either immediately or some time in the (hopefully) near future. When we look at a company's financial success, we typically first look at its earnings statement, one of the most important financial statements for a company, along with its balance sheet and cash flow statement.

To keep things simple, an income statement starts with revenue at the top and then shows a list of expenses (and often a few additional income sources) so that an investor can see how the company arrives at its earnings for a particular period of time, be it a year or a quarter.

When you see a company report earnings of X-cents a share, you're seeing that final number from the bottom of the income statement. However, investors rightfully want greater detail and different perspective on a company's financial success, which is exactly what EBITDA provides.

By taking out interest and taxes, investors can eliminate any positive or negative bias created by current interest rates or the varying tax rate that a company may be subject to. Depreciation and amortization appear on the income statement for accounting purposes, but are not actual cash expenses for a company and rely heavily on assumptions. So it's no wonder that investors like using EBITDA as a simpler and "more pure" financial measure, compared to the final earnings per share number.