EBITDA, which is often incorrectly confused with pretax earnings, is a measurement of a company's earnings before interest, taxes, depreciation and amortization. This metric is often used by investors and brokers to select what they believe will be profitable stocks. By considering pretax earnings, and removing the other elements to reach EBITDA, profitable stocks may be chosen by making more accurate comparisons between competing companies.

Using EBITDA to Compare Stocks

One of the issues when comparing profitable stocks without using pretax earnings or EBITDA is that different companies may have different tax structures. EBITDA goes a step further than simple pretax earnings by removing other elements that may differ across companies, like capital structure, equipment leasing choices and others.

The idea is to get a more pure view of which companies will have profitable stocks by making comparisons in metrics that are more comparable. For example, if one were to only consider pretax earnings, equipment-intensive businesses might appear to have more profitable stocks because of large depreciation numbers. EBITDA removes this consideration.

Likewise, companies that carry large amounts of debt may appear to have less profitable stocks if only pretax earnings are used because of the high amount of interest that they must pay. Again, EBITDA removes this difference and allows for a more direct comparison to be made.

EBITDA Stock Analysis Shortcomings

When searching for profitable stocks, whether one uses pretax earnings, EBITDA, or some other metric, it is important to recognize the importance of the figures being excluded. Pretax earnings may be a more consistent comparison, but a company's tax rate does affect its profitability. Profitable companies are likely to have profitable stocks, so it important to not blindly exclude material information from one's analysis. This is particularly important when comparing companies from different industries.

Using metrics like EBITDA may hide important differences in different companies' operations that may have a dramatic impact on the performance of the respective stocks. These metrics are a useful tool as long as they are used correctly.

There are a lot of factors when it comes to figuring out stock prices. For the most part, you can calculate the price of a stock by taking the company's market capitalization and dividing it by its total outstanding shares. A share is equal to one unit of a company's stock, so the price of shares is the same as the price of stock.

Basic Elements of Share Price: Market Cap - This is the total market value of the company.

Total Outstanding Shares - This is the total amount of public shares issued by the company.

PE Ratio - This stands for price to earnings ratio. You get this number by taking the price of stock divided by the companies earnings for the most recent quarter.

Price of Shares and the Stock Market

The price of shares fluctuates as supply and demand change. To keep markets liquid and moving there is what's called "Market Makers", they affect the price of shares by buying and selling for their own accounts.

These are generally large brokerage houses that move the price of stock based on their portfolio of stocks and market demand. The share price, or price of stock, moves on a minute by minute basis. Consider the market maker as a middle man, they balance the market which moves the price of shares.

You will see the price of stock move quickly when several market makers are bidding for it. Sometimes millions of shares exchange hands in minutes and the price of shares hardly moves. This is called block trading between brokerage houses.

Stock Price Movement

The price of shares is ultimately a function of what people are willing to pay for those shares. Even though the fundamentals of a stock don't justify the share price, in the short run it doesn't matter. If the market thinks the price of stock is worth more, then the share price will be out of balance to the underlying company financials.

Prices of shares, over the long run, always seem to balance out. This is especially true with blue chip stocks , they tend to hold there share price better because of high institutional holdings.

The price of stock can fluctuate based on news. Many times the news is not as bad as first thought, then the share price will return to normal.

So as you can see the price of stock goes beyond just the fundamentals. It's a perception of future value or perceived value. This is the reason many people buy mutual funds and keep them as an investment for years. This way the price of shares or share price don't matter to them in the short run.

Equities.com Editorial Desk

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