- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Accrual vs Provision
- Accrual vs Deferral
- Temporal Method
- Interim Financial Statements
- Consolidated Financial Statement
- Audited Financial Statements
- Interim Reporting
- Accounting Scandals
- Quality of Earnings
- Audit Risk
- Sunk Cost
- Leasehold vs Freehold
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Debit vs Credit in Accounting
- Single Entry System in Accounting
- Double Entry Accounting System
- Journal in Accounting
- General Journal
- Accounting Journal Entry
- Ledger in Accounting
- Journal vs Ledger
- General Journal vs General Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Adjusted Trial Balance
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Petty Cash Book
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Drawing Account
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Non-Performing Assets (NPA)
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Closing Stock
- Inventory vs Stock
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Trade Receivables
- Net Realizable Value (NRV)
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Prepaid Insurance
- Tangible vs Intangible Assets
- Tangible Assets
- Deferred Tax Assets
- Capital Expenditure (Capex)
- Capex vs Opex
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Goodwill Valuation
- Capitalized Interest
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Deferred Tax Liabilities
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Triple Net Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- Appropriated Retained Earnings
- Unappropriated Retained Earnings
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Final Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Qualified vs Ordinary Dividend
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Prime Cost
- LTM EBITDA
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Double Taxation
- Net Loss
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Trade Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Cost vs Expense
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Margin vs Markup
- Contribution Margin vs Gross Margin
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Accountant vs Actuary
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Personal Banker Job Description
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Firms in Singapore
- Accounting Books
EBIT vs EBITDA – What is Operating Profit? Let us have a look at the Income Statement of Colgate above. Is it EBIT (Earnings Before Interest and Taxes) or EBITDA (Earnings Before Interest Taxes Depreciation & Amortization)?
Operating profit is EBIT. EBIT defines any company’s profit including, all expenditures just leaving income tax and interest expenditures. However, EBITDA measure is good to be used for analyzing and comparing profitability between firms and businesses as it removes the impacts of accounting and financing decisions.
In this article on EBIT vs EBITDA, we look at its differences & usage in depth –
- EBIT vs EBITDA – Definition
- EBIT vs EBITDA – Key Differences
- EBIT vs EBITDA Examples
- Calculation of EBITDA of Colgate
- EBIT vs EBITDA – Capital Intensive Firms and Services Companies
- Key Points to Note about EBITDA
- EBITDA Drawbacks
EBIT vs EBITDA – Definition
In finance and accounting, earnings before interest and taxes (EBIT) defined as any company’s profit including, all expenditures just leaving income tax and interest expenditures. It is defined by the formula:
EBIT Formula = operating revenue – operating expenses or OPEX
If the company doesn’t have non-operating income for calculation purpose, then alternatively operating income may be used being similar to operating profit and EBIT.
Earnings before interest, taxes, depreciation and amortization or EBITDA, an accounting term calculated through the firm’s net earnings, prior to interest, taxes, expenses, amortization and depreciation that are deducted, being a substitute for a firm’s existing operating profitability. It is defined by the formula:
EBITDA = EBIT or operating profit + depreciation expenditure + amortization expenditure
Or, EBITDA = Total profit + Amortization + Depreciation + Taxes + Interest
Adding the company’s overall expenditures due to amortization and depreciation back to its EBIT.
EBITDA is basically net income added to amortization, depreciation, taxes and interest. EBITDA measure is good to be used for analyzing and comparing profitability between firms and businesses as it removes the impacts of accounting and financing decisions.
Verizon provides Consolidated EBITDA as a non-GAAP measure. Verizon management believes that these measures are useful for Investors in evaluating profitability and operating performance of the company.
source: Verizon Annual Report
WallStreetMojo Free Accounting Course
You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!
* Please provide your correct email id. Login details for this Free course will be emailed to you
As seen below – EBITDA = EBIT (Operating Income) + Depreciation and Amortization.
source: Verizon Annual Report
Also, note that EBITDA most often used for evaluating valuation ratios (EV/EBITDA) as against calculating revenue and enterprise value.
EBIT vs EBITDA – Key Differences
EBIT vs EBITDA Examples
EBIT vs EBITDA – Example 1
Suppose there’s a construction company having $70,000 revenue last year. But, the firm’s operating expenditures were recorded at $40,000. Therefore, EBIT = $70,000 – $40,000 = $30,000.
The expenditures include administrative, general, selling, cost of goods sold (COGS), utilities & rent, salaries, amortization, and depreciation.
- Add any depreciation expenses
Now, extending the same example for calculating EBITDA with key assumptions including, working lifetime expectation for the asset of 10 years. Suppose the machinery purchased by the company some time back had their consolidated value of $30,000 with a working life of say 10 years. In such case, upon assuming straight-line or linear depreciation, the machinery would together depreciate by $30,000/10 = $3,000 per year.
- Add any amortization expenses
Amortization is linked to depreciation however, it isn’t same technically. Amortization denotes the expenditures witnessed from the strategic acquisition of key intangible assets any time over their complete life, while depreciation used for tangible assets. Typically, amortization expenditures are recorded in line with depreciation expenditures on any company’s P&L or cash flow statements. Sum up any listed amortization expenditures for obtaining and recording one unique value.
- For instance, assume that some time back a company expended $2,000 for obtaining the rights for some famous Sufi song to be used in the commercials. Suppose this money purchased the song rights for say five years.
- Thus, Amortization expense = $2,000/5 years = $4, 00/year
Now, calculating EBITDA using the formula,
EBITDA = EBIT + amortization + depreciation
Adding back the overall expenditures due to amortization and depreciation to the firm’s EBIT. As EBITDA is defined as the calculation of net earnings prior to amortization, depreciation, taxes and interest. As amortization and depreciation were previously subtracted for EBIT calculation, one must add them again to find EBITDA.
- In the above example about construction company, let’s believe that the amortization and depreciation expenses identified earlier are just the costs incurred by the company (actually, one might find it crucial to add numerous depreciation or/and amortization expenditures to arrive at the net value).
- For this case, let’s evaluate EBITDA through the formula, EBITDA = amortization + depreciation + EBIT. $400 + $3000 + $30,000 = $33,400. Hence, the company’s EBITDA calculated to be $33,400.
EBIT and EBITDA – Example 2
Suppose a retail firm delivers $100 million of revenue and witnesses $40 million of product expense and $20 million of operating expenditures. Amortization and depreciation expenditure recorded at $10 million, delivering net profit from operations of $30 million. Further, the interest expenditure is $5 million that makes $25 million of earnings before taxes. Assuming a tax rate of 20%, net income becomes $20 million post $5 million of taxes that are deducted from the company’s pretax income. Employing EBITDA formula, let’s sum operating profit with depreciation, amortization expenditure for arriving at the EBITDA equals to $40 million ($30 million added to $10 million).
EBIT and EBITDA – Example 3
|Company A||Company B|
|Cost of Goods||(3,555,000)||(3,470,000)|
|Gross Profit||1,945,000 35.4%||1,780,000 33.9%|
|Selling, General &|
|Operating Income||395,000 7.2%||410,000 7.8%|
|Net Income||300,000 5.5%||275,000 5.2%|
|Depreciation + Amortization||110,000||170,000|
|EBITDA||505,000 9.2%||580,000 11.1%|
In the above example, company B has illustrated better EBITDA measure compared to company A despite having comparatively smaller top line growth.
EBITDA is defined by cash flow from operations that minimizes the impact of tax policies, financing and accounting on stated profits.
Calculation of EBITDA of Colgate
Below is the snapshot of the Income Statement of Colgate. As we saw earlier, the Operating Profit reported is EBIT (Earnings Before Interest and Taxes). If you look at the Income Statement closely, you will not find line Depreciation & Amortization line item.
A further look in Colgate’s accounting disclosures reveal that Depreciation that is attributable to manufacturing operations is included in Cost of Sales (before the Gross Profit). And the remaining of the depreciation is included in the SG&A or Selling General and Admin expense.
The best and the easiest way to find Depreciation and Amortization is to look at the cash flow statement. Cash Flow from Operations includes the Depreciation and amortization figures.
EBITDA (2015) = EBIT (2015) + Depreciaton & Amortization (2016)
EBITDA 2015 = 2,789 + 449 = $3,328 million
Likewise, EBITDA (2014) = 3,557 + 442 = $3,999 million
EBIT vs EBITDA – Capital Intensive Firms and Services Companies
Let us look at a typical Services Company EBIT/EBITDA and Capital Intensive Firm (manufacturing firm) EBIT/EBITDA
Services companies do not have a large asset base, their business model is dependent on Human Capital (employees). Due to this depreciation and amortization in Servies Companies in generally non-meaningful. However, Manufacturing Companies (or Capital Intensive companies) invest heavily in its set up and are dependent on the investments in assets to manufacture goods. Therefore, with higher asset base, its depreciation and amortization is relatively higher.
Consider the example below –
|Items||Service Company A||Manufacturing Company B|
Both, the companies have equal EBITDA while company’s A EBIT is $20 billion but company’s B EBIT is merely $0 billion.
EBIT vs EBITDA of Infosys – Service Companies
The difference between EBIT margin and EBITDA margin can tell us the relative amount of depreciation and amortization in the Income Statement. We note from the graph below that the difference between EBIT Margin and EBITDA Margin for Infosys is approximately 1.24% (27.34% – 26.10%). This is expected from services firm as they operate as an Asset Light model.
EBIT vs EBITDA of Exxon (Capital Intensive Firm)
Now let us compare the above graph with that Exxon. Exxon is an Oil & Gas company (highly capital intensive firm). As expected we note that the difference between EBIT Margin and EBITDA margin is very high – approximately 8.42% (13.00% – 4.58%). This is because of heavy investments in Property Plant and Equipment that leads to high depreciation and amortization figures.
Key Points to Note about EBITDA
EBITDA Data must be used responsibly
- Never use EBITDA like a key technique for determining the company’s financial strength. EBITDA is expected to have some utility in financial study. For example, it’s a simpler technique for identifying the amount of money that the company needs to remunerate for the remaining debts over the short-term – suppose a company has $2,000 for interest payments however, $3,000 as EBITDA, it’s observed that the firm has enough money to settle its debt. But, as EBITDA don’t take into account key expenditures and since it can be easily altered, hence it’s foolish to just use it being the sole measurement of the company’s strength. (also look at Interest Coverage Ratio)
- EBITDA don’t actually prove to be an accurate indicator of if any company is making money or losing money. In reality, it’s actually possible for any company to illustrate positive EBITDA while having negative free cash flows. Therefore, EBITDA can be used to falsely make any company appear much better than it truly is.
A company’s EBITDA shouldn’t be purposefully manipulated
- EBITDA may be altered through corrupt accounting methods. For instance, as amortization and depreciation are evaluated fairly in detail (through experience, estimates, and projections), it’s likely to alter the company’s EBITDA through alterations with its amortization and depreciation plans. However amortization and depreciation are non-cash expenditures (cash has previously been swapped for the amortizing/ depreciating assets), however, they are present for some reason. Finally, intangible assets perish and equipment flops. After this takes place, extremely real cash expenditures takes place.
- As a practical case of EBITDA management, Worldcom capitalized items that should have been expensed. Capitalization increased the depreciation and resulted in higher profit (due to reduced expenses) and also reported higher EBITDA keeping the analysts happy.
Never use EBITDA multiple to misrepresent any firm
- EBITDA is not a reliable multiple for determining any company’s financial health as it can be easily altered to post a rosy picture about any company that is enough to misguide the lenders and investors. For example, in some businesses the limit for taking loans are determined by calculating the EBITDA percentage, therefore, by controlling the firm’s EBITDA, business holders can easily deceive lenders into offering huge loans as against under normal lending conditions.
- Fake practices such as these are crafted to fraud a firm’s stakeholders are corrupt and may even be unlawful.
- EBITDA is an adjusted figure that enables healthy decision-making capabilities for what must be and what must not be taken while performing the calculation. Further, it also signifies that firms often alter the elements involved while performing EBITDA calculation across different reporting periods.
- EBITDA was first introduced with leveraged buyouts during the 1980s, while it was employed to identify the capability of any company to successfully service the entire debt. With the passage of time, EBITDA became extremely popular among industries having exclusive assets that required write down over longer time periods. At present, EBITDA is most commonly used by several companies, particularly belonging to the tech segment although it stays warranted.
- Most common delusion comprises of EBITDA equivalent to the cash earnings. However, EBITDA forms a good evaluator of profitability however not cash flows. EBITDA even forgets the total cash needed for funding the working capital as well as old equipment’s replacement that may be notable. Thus, EBITDA is frequently used like an accounting trick for making any company’s earnings appear lucrative to the investors. While using this technique, it is important that stockholders also emphasize on other key performance metrics for being sure that the company isn’t hiding something under the EBITDA metric.