By: Michael E. Martinez

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amoritzation. When companies report their financial statements, their EBITDA is also reported. It's useful for comparing companies in the same sector with similiar capital costs. It enables investors to avoid distortions due to different accounting methods. It gives you an idea how a particular company is preforming. Usually it's stated from year to year, if the EBITDA is growing slowly, then the company is becoming less profitable. If the EBIDA is growing quickly, so is that company.

The balance sheet is one of the most important vehicles as to determining whether a certain company is worth of investing in. EBITDA first came into common use with leveraged buyouts in the '80s, where it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector, even when it isn't warranted.

A common misconception is that EBITDA represents cash earnings. EBITDA is a good measure to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Also, EBITDA is often used as an accounting gimmick to dress up a company's earnings. When using this metric, it's key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.