EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are both metrics used to measure a company’s profitability.
EBIT
EBIT is calculated by subtracting interest expense and taxes from a company’s net income. It shows a company’s operating profit before considering the impact of interest and taxes.
Formula: EBIT = Net Income + Interest Expense + Taxes
EBITDA
EBITDA is similar to EBIT, but it also adds back depreciation and amortization expenses. This metric is often used in leveraged buyouts or when a company has significant non-operating income or expenses.
Formula: EBITDA = EBIT + Depreciation + Amortization
Key differences
- Depreciation and Amortization: EBITDA includes these non-cash expenses, whereas EBIT does not.
- Cash flow focus: EBITDA is often used to evaluate a company’s cash flow generation capabilities, as it excludes the impact of non-cash items like depreciation and amortization.
- Interest expense: Both metrics exclude interest expense, but EBITDA might be more relevant for companies with high levels of debt.
In summary
- Use EBIT when you want to focus on a company’s operating profitability without considering the impact of non-operating income or expenses.
- Use EBITDA when you want to evaluate a company’s cash flow generation capabilities and consider the impact of depreciation, amortization, and other non-cash items.