EBIT vs EBITDA
EBIT calculates the operating income once expenses are reduced from revenue without taking into consideration the tax and interest. EBITDA, however, does not take into consideration depreciation and amortization, in addition to tax and interest. EBIT nullifies the debt capital and tax rates used, and EBITDA nullifies accounting and financing effects which make them both suitable to use for comparing the profitability between firms. Due to many similarities between the two and the way they are calculated, they are often misinterpreted or thought to be the same. The article clearly explains each concept and points out how these two terms are different to each other.
What is EBIT?
EBIT refers to Earnings Before Interest & Tax and measures a company’s profitability. EBIT is also used to evaluate a company’s ability to earn income on a continuous basis as a result of ongoing business operations. EBIT is calculated as,
EBIT = Revenue – Operating Expenses.
EBIT can also be calculated by adding back interest and taxes to net income. Since EBIT does not take into consideration interest and tax payments, this makes it easier to compare profitability between firms as different debt capital and tax rates paid by different companies are not taken into consideration.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The EBITDA acts as an indicator of a firm’s financial performance and is useful in making comparisons between competitors, since accounting and financing effects are not considered and, therefore, do not affect the EBITDA. EBITDA is calculated as
EBITDA = Revenue – Expenses (all other expenses excluding Interest, Taxes, Depreciation, Amortization).
As shown by the formula, all expenses other than the interest, tax, depreciation, and amortization are reduced from the revenue, to arrive at EBITDA. EBITDA is useful as means to identify a company’s capability in repaying its debts. It is also used by organizations that have high value assets that are depreciated over longer periods of time. EBITDA is generally used to evaluate a company’s profitability but may not be a good indicator of cash flow.
A disadvantage of using EBITDA is that it does not take into account changes in working capital or capital expenditures and, therefore, may not show the true picture of the firm’s financial position.
What is the difference between EBIT and EBITDA?
The major difference between EBIT and EBITDA is the amortization and depreciation amounts. EBITDA is earning before interest, tax, depreciation and amortization are reduced, whereas EBIT is before interest and tax is reduced (amortization and depreciation are reduced from earning to arrive at EBIT). In simpler terms, depreciation and amortization is included in EBIT and is excluded from EBITDA. EBIT includes depreciation and amortizations which can act as an estimate for capital expenditure that needs to be borne in order to achieve profitability. EBITDA does not include depreciation or amortization and, therefore, focuses on the firm’s profitability and not the expenses and investments that needed to be made to gain profits.
Summary:
EBIT vs EBITDA
• EBIT is calculated as, EBIT = Revenue – Operating Expenses. EBIT can also be calculated by adding back interest and taxes to net income.
• EBITDA is calculated as EBITDA = Revenue – Expenses (all other expenses excluding Interest, Taxes, Depreciation, Amortization).
• The major difference between EBIT and EBITDA is the consideration of amortization and depreciation.