EBIT vs. EBITDA
Both are ways to measure profits in a business. While similar, they differ in critical ways and ultimately measure two different forms of income which will yield very different results.
Key Takeaways
EBIT and EBITDA are two ways of measuring a business's profitability.
EBIT stands for earnings before interest and taxes.
EBITDA stands for earnings before interest, taxes, depreciation and amortization.
What Is the Difference Between EBIT and EBITDA?
Both EBIT and EBITDA strip out the cost of debt financing and taxes, while EBITDA takes another step by putting depreciation and amortization expenses back into the profit of a company. Since depreciation is not captured in EBITDA, it can lead to profit distortions for companies with a sizable amount of fixed assets and subsequently substantial depreciation expenses. The larger the depreciation expense, the more it will boost EBITDA. 1
How do you calculate EBIT?
EBIT = (Revenue) - (Cost of Goods Sold) - (Operating Expenses)
or
EBIT = (Net Income) + (Interest) + (Taxes)
EBIT stands for earnings before interest and taxes. And when we say earnings, we mean profit. You can find a business's net profit on the bottom line of income statement. So, this is going to be our starting point for the calculation before means that we're going to add back and what are we going to add back interest and tax interest Expenses are the cost of borrowing money. It's a non-operating cost. So it sits below operating profit, and tax expenses are what the business reconciles owes to the local tax authority for this accounting period. You can calculate EBIT earnings before interest and taxes by taking a business's net profit and adding back the interest and tax expenses.
How do we calculate EBITDA?
EBITDA = (Operating Income) + (Depreciation) + (Amortization)
or
EBITDA = (Net Income) + (Interest) + (Taxes) + (Depreciation) + (Amortization)
It's very similar process EBITDA means earnings before interest, taxes, depreciation and amortization. So, we start with net profit and add back interest and taxes just like we did for EBIT. But this time, we're going to go a step further by adding back depreciation and amortization as well.
Depreciation Expenses are the cost of reducing the book value of tangible assets. Those are assets that you can touch. This is because of use wear and tear, the passing of time or obsolescence. And amortization is very similar. It's the cost of reducing the book value of intangible assets, assets that you can't touch.
So EBITDA, earnings before interest, taxes, depreciation and amortization is equal to a business's net profit plus interest expenses and tax expenses, plus any depreciation and amortization incurred during the year.
Where can you find EBIT and EBITDA on financial statements?
They both live in the income statement. This is the financial statement, which summarizes businesses revenues, and expenses over a period of time, revenue less expenses is profit. And like I mentioned, EBIT and EBITDA are both measures of profitability.
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