*** New Video: V4. The EV/EBITDA Ratio

In order to address some of the shortcoming of the P/E Ratio - or at a minimum, try to provide additional information, another ratio that is very commonly used used is the EV/EBITDA ratio. Like the P/E ratio, this ratio uses one year of data and tries to establish a relationship between the value of the company and some measure of profitability. In order to adjust for the fact the earnings are influenced by interest cost, tax charges, depreciation and amortization - none of of which is directly linked to the operations of the company, this ratio compares this to the Enterprise Value of the company, which is the Market Capitalization (the market value of the equity (P x number of shares)) plus the net debt (debt - cash).

This measure therefore compares a broader measure of the company's value - one which includes net debt which an acquirer would have to assume, and compares it to EBITDA - a measure of the operating earnings of the company, thereby neutralizing the effect of varying interest levels between companies and depreciation policies. The EBITDA measure is not perfect, but clearly one can argue that it 'cleans' the earnings to provide a number that is more reflective of the operating performance of the company.

The drawback that it only looks at one year's worth of data remains.

13. What is a Stock?

Everyone should know what a stock and a bond are - this video gives a quick intro to that. What stocks and bonds are has a lot to do with how providers of capital interact with users of capital (through equity (which includes stocks for many large companies) and debt (which includes bonds for many large users of capital).

12. Links between the Financial Statements

Each of the three financial statements captures different aspects of a companies financial situation - about operations as a going concern (Income Statement), about actual cash flows - also going beyond Operations to include Investing and Financing (Cash Flow Statement) and the assets and liabilities of the company (Balance Sheet).

Therefore it only makes sense that some links exist between all the three statements - income and cash flows for example, income over a year that is not paid out as dividends and change in assets etc.

Having an appreciation of these links is a clear indication that conceptually the 3 financial statement have become clear.

*** New Video: 15. The Capital Structure of a Company

This video highlights what is spoken about when we talk about the capital structure of a company - effectively the structure of that company's financing, which is very tied to the right side of that company's balance sheet - for the book values, as well as the market values of the items on the right side of the balance sheet.