Ebit Vs Ebitda Top Differences Examples Calculation

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 TaxesEarnings Before Interest And TaxesEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more) 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, the EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more measure is good 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

In finance and accounting, earnings before interest and taxes (EBIT) are defined as any company’s profit, including all expenditures just leaving income tax and interest expenditures. The formula defines it:

EBIT Formula = operating revenueOperating RevenueOperating revenue is defined as revenue earned by an individual, corporation, or organization from the core activities that they undertake on a regular basis. There are several methods to earn revenue, but operational revenue is earned by the core business activities that the organization undertakes in its daily operations.read more – operating expenses or OPEX

If the company doesn’t have non-operating incomeNon-operating IncomeNon-Operating Income, also called Peripheral Income, is the capital amount that a business earns from non-core revenue-generating activities. The examples include profits/losses from a capital asset sale or Foreign Exchange Transactions, Dividend Income, Lawsuits losses, & Asset Impairment losses, etc. read more for calculation purposes, then operating income may be used similarly to operating profit and EBIT.

Earnings before interest, taxes, depreciation, amortization, or EBITDA, an accounting term calculated through the firm’s net earnings, before interest, taxes, expenses, amortization, and depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more deducted, is a substitute for a firm’s existing operating profitability. The formula defines it:

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 net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more added to amortization, depreciation, taxes, and interest. EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more measure is good 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.

source: Verizon Annual Report

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

Also, note that EBITDA is most often used for evaluating valuation ratios (EV/EBITDA) against calculating revenue and enterprise valueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more.

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.

EBIT depicts a company’s operating earningsOperating EarningsOperating Earnings is the amount of profit a company earns after deducting direct and indirect costs from sales revenue. It is also referred to as EBIT, which stands for profits before interest and taxes.read more 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 ratesDepreciation RatesThe depreciation rate is the percent rate at which an asset depreciates during its estimated useful life. It can also be defined as the percentage of a company’s long-term investment in an asset that the firm claims as a tax-deductible expense throughout the asset’s useful life.read more, they most often leave them with poor earnings. In addition, negative earnings often make valuation difficult. Hence analysts instead depend on an EBITDA measure for identifying total earnings really accessible for the payment of a debt.
EBIT determines the firm’s profit that comprises 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 flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more.
Calculation: EBIT = revenue – operating expenditures.
Calculation: EBITDA = revenue – operating expenditures (leaving amortization and depreciation).

The expenditures include administrative, general, selling, cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more (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. For example, suppose the machinery purchased by the company some time back had a consolidated value of $30,000 with a working life of, say, ten 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 at any time over their complete life, while depreciation is 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 spent $2,000 to obtain the rights for some famous Sufi songs 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 expenditures due to amortization and depreciation to the firm’s EBIT. EBITDA is the calculation of net earnings before amortization, depreciation, taxes, and interest. As amortization and depreciation were previously subtracted for EBIT calculationEBIT CalculationEBIT is a profitability tool used to measure the operating Profits of a Company. You can calculate it either by, EBIT = Gross Sales – Company Expenses & Cost of Goods Sold, Or, EBIT = Total Profit + Interest + Taxes.read more, 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 was 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 was recorded at $10 million, delivering a net profit from operations of $30 million. Further, the interest expenditure is $5 million, making $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 the EBITDA formulaEBITDA FormulaEBITDA is Earnings before interest, tax, depreciation, and amortization. Its formula calculates the company’s profitability derived by adding back interest expense, taxes, depreciation & amortization expense to net income. EBITDA = net income + interest expense + taxes + depreciation & amortization expenseread more, let’s sum operating profit with depreciation and amortization expenditure to arrive at the EBITDA equals $40 million ($30 million added to $10 million).

EBIT and EBITDA – Example 3

In the above example, company B has illustrated a better EBITDA measure compared to company A despite having comparatively smaller top line growth.

EBITDA is defined by cash flow from operationsCash Flow From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more 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). However, if you look at the Income Statement closely, you will not find the Depreciation & Amortization line item.

A further look at Colgate’s accounting disclosures reveals that depreciation attributable to manufacturing operations is included in the Cost of SalesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more (before the Gross Profit). And the remaining depreciation is included in the SG&A expense or Selling General and Admin expense.

The best and the easiest way to find Depreciation and Amortization is to look at the cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more. Cash Flow from Operations includes the depreciation and amortization figures.

EBITDA (2015) = EBIT (2015) + Depreciation & 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. Therefore, their business model is dependent on Human Capital (employees). Due to this, depreciation and amortization in Services Companies are generally non-meaningful. However, Manufacturing Companies (or Capital Intensive companiesCapital Intensive CompaniesCapital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more) invest heavily in their setup and are dependent on investments in assets to manufacture goods. Therefore, its depreciation and amortization are relatively higher with a higher asset base.

Consider the example below –

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 and EBITDA margins can tell us the relative amount of depreciation and amortization in the Income StatementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more. For example, the graph below shows 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.

source: ycharts

EBIT vs EBITDA of Exxon (Capital Intensive Firm)

Now let us compare the above graph with that of Exxon. Exxon is an Oil & Gas company (highly capital intensive firm). As expected, we note that the difference between EBIT Margin and EBITDA marginEBITDA MarginEBITDA Margin is an operating profitability ratio that helps all stakeholders of the company get a clear picture of the company’s operating profitability and cash flow position. It is calculated by dividing the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) by its net revenue. EBITDA Margin = EBITDA / Net Salesread more is very high – approximately 8.42% (13.00% – 4.58%). This is because the heavy Property Plant and EquipmentProperty Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more investment leads to high depreciation and amortization figures.

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 reimburse 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, it’s foolish to just use it as the sole measurement of the company’s strength. (also, look at Interest Coverage RatioInterest Coverage RatioThe interest coverage ratio indicates how many times a company’s current earnings before interest and taxes can be used to pay interest on its outstanding debt. It can be used to determine a company’s liquidity position by evaluating how easily it can pay interest on its outstanding debt.read more)EBITDA doesn’t prove to be an accurate indicator of whether any company is making money or losing money. Any company can illustrate positive EBITDA while having negative free cash flows. Therefore, EBITDA can 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 methodsAccounting MethodsAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more. For instance, as amortization and depreciation are evaluated fairly in detail (through experience, estimates, and projections), the company’s EBITDA is likely to be altered by 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 assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can’t touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more 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, resulted in higher profit (due to reduced expenses), and 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. 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 against 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 and should not be taken while performing the calculation. Further, it also signifies that firms often alter the elements involved while performing EBITDA calculations across different reporting periodsReporting PeriodsA reporting period is a month, quarter, or year during which an organization’s financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more.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 time, EBITDA became extremely popular among industries with exclusive assets that required writing down over longer 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 EBITDA equivalent to 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 and old equipment replacement, which may be notable. Thus, EBITDA is frequently used as an accounting trick for making any company’s earnings appear lucrative to investors. While using this technique, it is important that stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company’s owners, but their liability is limited to the value of their shares.read more also emphasize other key performance metrics to ensure that the company isn’t hiding something under the EBITDA metric.

EBIT vs EBITDA#

EBIT vs EBITDA – Definition#

EBIT vs EBITDA – Key Differences#

EBIT vs EBITDA Examples#

EBIT vs EBITDA – Example 1#

EBIT and EBITDA – Example 2#

EBIT and EBITDA – Example 3#

Calculation of EBITDA of Colgate#

EBIT vs EBITDA – Capital Intensive Firms and Services Companies#

EBIT vs. EBITDA of Infosys – Service Companies#

EBIT vs EBITDA of Exxon (Capital Intensive Firm)#

Key Points to Note about EBITDA#

EBITDA Data must be used responsibly#

A company’s EBITDA shouldn’t be purposefully manipulated.#

Never use EBITDA multiple to misrepresent any firm.#

EBIT vs EBITDA Video#

EBITDA Drawbacks#

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