Why do I look at EBIT?

A frequent question that I get on twitter (@ConfidentInvest) or on emails sent to me via this site is:

Why do I look at EBIT?

In particular, why do I look at the growth of this value?

My answer to this is quite straightforward, but first it my make sense for you to take a quick refresher on EBIT. Rather than typing a lot of words, I am going to ask Hamilton Lin of Wall Street Training to explain it.

As you heard Mr. Lin explain at about 1:20, EBIT is the core sustainable profitability from the core operations of the company. In other words, this is what the company does as a company, and this is how much the company makes for doing it. It is just simply logical that we want to look at this core value, and we want this core value to grow!

There are other metrics that I use to analyze a company. It concerns me when an analyst recommends a company that cannot get its core operations to grow. If the stock price is growing faster than the core operations is growing (taking into account the multiplier effect of P/E) then either the company was too cheap before or it is too expensive now.

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