A tax calculation table (Photographer: Daniel Acker/Bloomberg)

BQLearning: Demystifying Ebitda, EPS, PE Ratio And Return Ratios

BQLearning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.

To understand the financial health of a company, it’s important to go beyond the headline numbers of revenue, profit and margin.

But the jargon that expert investors and analysts use can be daunting.

In this show, Anupam Gupta, a consultant at Aavan Research, explains four key indicators of financial health--Ebitda, EPS, PE ratio and return ratios--and tells you how to use them to assess a company’s performance.

What Is Ebitda?

Ebitda stands for earnings before interest, taxes, depreciation, and amortisation. It measures the operating profitability of the company by deducting operating expenses from total revenue.

It does not take into consideration the cost of debt and tax incidence or any non-cash expenditures like depreciation and amortisation. Ebitda is also used to derive the Ebitda margin, which is useful for comparing different companies in the same industry.

What Is EPS?

EPS stands for earnings per share. It breaks down a company’s profits on a per share basis, indicating a company’s profitability. EPS is an important indicator in determining a company’s share price. It's also used to calculate the price-to-earnings ratio.

What Is PE Ratio?

PE ratio or the price-to-earnings ratio is one of the most important parameters used to assess if a stock is undervalued or overvalued. It is also an indication of how much an investor is willing to pay for a company’s earnings. Price -to-earnings ratio is calculated by diving the stock price of the company with its earnings per share.

What Are Return Ratios?

Return ratios represent a company’s ability to generate returns for its shareholders. Both return on equity (ROE) and return on capital employed (ROCE) are ratios used to measure the efficiency with which a company can generate profits.

Return on capital employed measures the efficiency with which a company can employ its capital – both debt and equity. A high ROCE shows evidence of efficient use of capital.