EBIT vs EBITDADefined, Diffences, and Examples

Denise Elizabeth P
Senior Financial Editor & Contributor

When it comes to measuring the profitability of a business, two of the most common metrics used are EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

EBIT is a measure of profitability before the interest and taxes are deducted while EBITDA takes EBIT and reduces it by the amount of depreciation and amortization recognized.

With both EBIT and EBITDA used to measure the profitability of the core business operations of a company, their key difference lies with EBITDA not including depreciation and amortization in the computation.

Depreciation and Amortization are non-cash expenses and represent the cost of assets spread across its useful life.

EBIT includes cash and non-cash expenses in its computation while EBITDA only considers cash expenses.

An important consideration to point out is that EBIT and EBITDA are financial metrics that are not approved by Generally Accepted Accounting Principles (GAAP).

However, they can be used for financial analysis and can be added along with the financial reports that are statutorily required.

EBIT vs EBITDA

What is EBIT?

EBIT measures the profitability of the core operations of a company before the interest and taxes paid, which are not directly related to the core operations of the business.

By removing interest and taxes, the operating profit of the company can be truly determined.

In the Income Statement reported for a given period, the EBIT can be computed based on the information provided.

EBIT Calculation

There are two ways for EBIT to be calculated:

EBIT = Net Income – Interest Expense – Taxes

-or-

EBIT = Net Revenue – Cost of Goods Sold – Operating Expenses

Analysis

When looking at the Income Statement, EBIT is the section called operating income.

This information is particularly helpful for investors who are looking at investing in companies that operate under the same industry.

Some companies may be so capital intensive and pay more in interest and other companies may have different tax jurisdictions.

Whatever the case may be, when both interest and taxes are removed from the analysis, investors will be able to just look at the profitability of the companies based on their core operations using either of the EBIT formulas stated above.

Excluding interest from the analysis can often mislead investors with the information that they are trying to gather because it will not be able to accurately provide the financial resiliency of the company.

What is EBITDA?

EBITDA is also used as a measure of profitability but excludes the interest, taxes, depreciation and amortization.

Just like EBIT, EBITDA focuses on the operational profitability of the company but further excludes non-cash expenses like depreciation (for fixed assets) and amortization (for intangible assets).

Companies that belong in the same industry might have different asset structures.

By removing depreciation and amortization, along with interest and taxes, will allow investors to carefully compare the profitability of the operations of each of the companies.

EBITDA Calculation

There are two ways for EBITDA to be calculated:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

-or-

EBITDA = Net Revenue – Cost of Goods Sold – Operating Expenses + Depreciation + Amortization

The first formula can be derived from the Income Statement and can be completed by working back and adding the expenses that were previously subtracted to arrive at the Net Income.

The second formula is simply computing EBIT and then adding back the non-cash expenses (depreciation and amortization).

Analysis

When applying EBITDA in the profitability analysis of a company, investors and other stakeholders must understand that to arrive at the EBITDA amount, both cash and non cash expenses are removed from the computation.

By removing them, those who are looking at the profitability of the company purely on its core operations will not be able to see its financing structure and tax payments which are cash outflows and can be a significant amount.

Also excluding depreciation even if it is only an accounting application of how assets are expensed will not be able to give investors an indication if a company is asset intensive or not.

When a company is asset intensive, that means that they record high depreciation amounts and removing them will give a false impression that a company has low monthly expenses.

EBIT vs EBITDA

Key Differences Between EBIT vs EBITDA

To better understand the differences between and EBIT and EBITDA, here are their key differences:

  1. EBIT only excludes interest and taxes, EBITDA excludes interest, taxes, depreciation and amortization.
  2. EBIT includes cash and non-cash operating expenses while EBITDA only includes cash operating expenses.
  3. EBIT is typically used as a metric by companies that are highly leveraged. EBITDA is used as a metric for companies that are asset intensive and are financed by debt.

It is helpful to calculate both EBIT and EBITDA as they both are able to paint a picture of how a company is able to generate profit based on their operations.

Example of EBIT vs EBITDA

To illustrate how EBIT and EBITDA are calculated, let us look at the Cash Flow Statement and Income Statement of Company ABC:

Company ABC

Income Statement

For the Year Ended Dec 31, 2020

Net Revenue $ 1,200,000.00
Cost of Goods Sold $ 625,000.00
    Gross Profit $ 575,000.00
Operating Expenses $ 300,000.00
    Operating Profit $ 275,000.00
Interest Expense $ 32,500.00
Taxes Paid $ 12,500.00
    Net Income $ 230,000.00

To calculate the EBIT from the above illustration, there are two ways to do that: by simply looking at the operating profit, one can already determine the EBIT.

The other method is to work from the Net Income and then add back the interest and taxes paid.

EBIT = $230,000 + $12,500 + $32,500

EBIT = $275,000  

Company ABC

Statement of Cash Flows

For the Year Ended Dec 31, 2020

Net Income $ 230,000.00
Less: Depreciation & Amortization $ (75,000.00)
Less: Changes in Working Capital $ (25,000.00)
Cash from Operations $ 130,000.00

To compute for EBITDA, the computation is simple: take the EBIT and then add back the total depreciation and amortization.

EBITDA = $275,000 + $75,000

EBITDA= $350,000

Why Is EBITDA Preferred to EBIT?

Based on the above example, companies will be more inclined to use EBITDA as a performance metric of a company because it provides a better indication of their profitability, especially if a company has a significant amount of assets that reduces EBIT and the net income of a company.

With companies that have high capital investments or when needing to prepare a company valuation, EBITDA is always the preferred metric.

What Does a Low EBIT but High EBITDA Indicate?

There are two ways for EBITDA to increase but decrease EBIT: through purchase of fixed assets or acquisition of intangible assets.

Both scenarios could cause a lower EBIT amount due to the recognition of the depreciation and amortization since they are both to be included in the operating expenses but when computing for EBITDA, they are to be added back and this will cause the EBITDA to be higher.

Companies will want to show whichever will allow them to show a higher profitability from their core operations.

When a company pays high interest costs from financing, they will be more inclined to show EBIT rather than showing the net income.

And if a company is asset intensive, showing EBITDA makes more sense.

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  1. Pittsburg State University "What Is EBITDA?" Page 1 . December 3, 2021

  2. NYU Stern " VALUE/EBITDA MULTIPLE" Page 1 . December 3, 2021

  3. Practising Law Institute "Understanding and Using EBITDA in Legal Practice " Page 1 . December 3, 2021