Some analysts have started using another measurement
of earnings known as
core earnings
that has been pioneered by the research
firm Standard & Poor's. This measure requires companies to
count employee stock options as an expense and to leave out any
revenues or expenses that come from something other than the company's
core business. For example, gains and losses in a company's pension
plan investments can be included in a calculation of its operating
earnings but not of its core earnings.
Further, some companies differ on when they record
revenue:
on a cash basis, when the income is received, or on an accrual
basis, when the income is earned, or when the sale is recorded.
When you compare the earnings of different companies, it's legitimate
to ask how earnings are calculated, to avoid comparing apples
to oranges.
Sam Stovall,
Chief Investment Strategist at Standard & Poor’s
Sam Stovall of S&P describes the advantages and limitations of EBITDA for valuation.
EBITDA stands
for earnings BEFORE interest, taxes, depreciation, and amortization.
While it is a useful
valuation
measurement, it is not synonymous with earnings, since a company still
has to pay interest to bond holders, taxes to Uncle Sam, and still account
for depreciation
and amortization.
Sam Stovall, 