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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.

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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.

Now the term "target estimate" looks like a combination of two terms commonly used by stock analysts, target price and estimate. To make sure I answer this question, I'll give a quick review of both of these terms. I suppose the term "target estimate" gets used sometimes, but it's sort of redundant.

Estimates are the bread and butter of research firms. The analysts at these firms stay on top of companies in their coverage universe and make revenue and earnings projections based on their analyses. These projections are part of extremely detailed financial models that analysts put together, which plot out the analyst's expectations for the company's finances on a quarterly basis a year or more into the future.

Most publicly traded companies have many analysts covering their stock, and so you will sometimes read about "consensus estimates," which is the

average

earnings or revenue number for a company when you look at all the varying analyst projections.

When you read that a company "beat estimates by a penny" for a quarter, that means that the company's earnings were probably above some individual analysts' expectations and below the projections of others', but came in one cent higher than the average of all their projections. For example, on Jan. 25, 2007,

Microsoft

(MSFT) - Get Report

reported fourth-quarter earnings of 26 cents a share, 3 cents better than consensus estimates that had predicted EPS of 23 cents a share.

"Target price" is another term that is commonly used by analysts. Based on the detailed analyses that they do on each company, many investors want to know an analyst's target price on the stock (i.e., where the stock is headed over the next year). Typically, the analyst will choose a valuation method (yes, there are many different techniques) and arrive at a "fair value" price for the stock based on the company's expected financial performance over the long term. Analysts will often move their price target on a stock up or down as they make adjustments to their models. This is why readers will see a headline such as "Prudential raises price target on

Google

(GOOG) - Get Report

."

In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback;

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