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The Power of EBITDA

dxcm

The Chart above is of Dexcom, a small cap company that operates in the diabetes testing market. I thought it and some of the charts that follow would be interesting for you to see how a company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) – or basically its operating cash flow – correlates with its stock price.

I’ve plotted the stock price (blue line) against their EBITDA per share (gold line). I think that as investors its important to note that when you look as stocks for your portfolio, you can focus on EBITDA per share as stock price tends to follow it and when it doesn’t it can tell you that you have an opportunity.

You can see for Dexcom, that the correlation is quite clear.

Here is J2 Global Communications (JCOM):

jcom

Here is EMC (EMC):

emc

Here is GreenDot (GDOT):

gdot

Here is Novo NorDisk (NVO):

nvo

Here is Aerovironment (AVAV):

avav

Here is HAIN:

hain

Some things to take away from the above that I see (which would lead me to do more research) are: (1) for AVAV, EBITDA is up but the price has pulled back – this may present a buying opportunity before the next leg up in price for this stock; and (2) for HAIN, you have exactly the opposite situation, with EBITDA down but price up – this may be an indication to sell it or to hold off to be a buyer for a better entry point.

EBITDA is one of the key pieces of financial information that investors need to follow.

In coming posts, I plan to provide you with other similar things to look for when reviewing companies.

Stay tuned 🙂

Mark