EBIT vs EBITDA | Top Differences | Examples | Calculation

EBIT is earnings before interest and taxes which is the Operating Income generated by the business whereas, EBITDA is earnings before interest, taxes depreciation and amortization which represents the entire cash flow generated from operations of a business.

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)?

The 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.

Colgate EBIT

In this article on EBIT vs. EBITDA, we look at its differences & usage in depth.

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 purposes, then alternatively operating income may be used 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 the profitability and operating performance of the company.

Importance of EBITDA

source: Verizon Annual Report

As seen below – EBITDA = EBIT (Operating Income) + Depreciation and Amortization.

EBIT vs EBITDA - Verizon

source: Verizon Annual Report

Also, note that EBITDA most often used for evaluating valuation ratios (EV/EBITDA) against calculating revenue and enterprise value.

EBIT vs EBITDA – Key Differences


EBIT EBITDA
  • EBIT depicts a company’s operating earnings prior to interest and taxation but subsequent to depreciation.
  • EBITDA illustrates earnings prior to any amortization or depreciation.
  • For reconciling EBIT with GAAP-responsive figures, SEC usually recommends leveraging net income for calculations as identified from the operating statements.
  • EBITDA is most commonly used by highly capital-intensive and leveraged companies that need significant depreciation schemes like those required with telecommunications or utility companies. Since these companies have significant debt interest payments and elevated depreciation rates, they most often leave them with poor earnings. In addition, negative earnings often make valuation difficult. Hence analysts instead depend on EBITDA measure for identifying total earnings really accessible for the payment of a debt.
  • EBIT determines the firm’s profit that comprises of all the expenditures, leaving only tax and interest expense.
  • EBITDA determines a company’s real operating performance devoid of any concealed expenses such as amortization, depreciation, tax, and interest.
  • It represents operating results on an accumulation basis.
  • It represents operating results on the basis of cash flows.
  • Calculation: EBIT = revenue – operating expenditures.
  • Calculation: EBITDA = revenue – operating expenditures (leaving amortization and depreciation).

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 a 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 the same technique. 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. 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 the 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 posts $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
Revenue 5,500,000 5,250,000
Cost of Goods (3,555,000) (3,470,000)
Gross Profit 1,945,000       35.4% 1,780,000          33.9%
Selling, General &
Administrative Expenses (1,550,000) (1,370,000)
Operating Income 395,000           7.2% 410,000           7.8%
Interest Expenses (30,000) (70,000)
Taxes (65,000) (65,000)
Net Income 300,000             5.5% 275,000            5.2%
Net Income 300,000 275,000
Interest Expense 30,000 70,000
Taxes 65,000 65,000
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.

Colgate - Finding Depreciation for EBITDA

A further look at Colgate’s accounting disclosures reveal that Depreciation that is attributable to manufacturing operations is included in the Cost of Sales (before the Gross Profit). And the remaining of the depreciation is included in the SG&A expense or Selling General and Admin expense.

EBITDA - Depreciation

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.

Colgate - Finding Depreciation for EBITDA - Part 2

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 a higher asset base, its depreciation and amortization are relatively higher.

Consider the example below –

Items Service Company A Manufacturing Company B
Revenue $200 $200
Cash Expenses $180 $180
Depreciation and
Amortization $0 $20
EBIT $20 $0
EBITDA $20 $20

Both the companies have equal EBITDA while the company’s EBIT is $20 billion, but the company’s B EBIT is a mere $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 a services firm as they operate as an Asset Light model.

EBIT vs EBITDA - Services Companies

source: ycharts

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.

EBIT vs EBITDA - Capital Intensive Companies

source: ycharts

Key Points to Note about EBITDA

EBITDA Data must be used responsibly

  • Never use EBITDA as a key technique for determining the company’s financial strength. EBITDA is expected to have some utility in a 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 doesn’t take into account key expenditures and since it can be easily altered, hence it’s foolish to just use it is the sole measurement of the company’s strength. (also look at Interest Coverage Ratio)
  • EBITDA doesn’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 take 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 is 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.

EBIT vs EBITDA Video

EBITDA Drawbacks


  • 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.
  • The 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 replacement that may be notable. Thus, EBITDA is frequently used as 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.

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Reader Interactions

Comments

  1. AvatarJagan says

    Hi,

    If a company has a negative EBITDA, then it will be obvious that EBIT will also be negative?

    Is this the right inference

    • AvatarDheeraj Vaidya says

      Yes, you are right. EBITDA = EBIT + D&A. D&A can be either 0 or positive. Hence, if EBITDA is negative, then EBIT must be negative.

  2. AvatarSwapnil says

    Your articles are well written and clarify basic concepts well.

  3. AvatarAdebisi says

    God bless you. Well done!

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