EBIT vs EBITDA

Comparing EBIT and EBITDA

What is the difference between EBIT and EBITDA?

The difference between EBIT and EBITDA is that Depreciation and Amortization have been added back to Earnings in EBITDA, while they are not backed out of EBIT. This guide on EBIT vs EBITDA will explain all you need to know!

EBIT stands for Earnings Before Interest and Taxes.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

 

Breaking down EBIT

As noted above EBIT represents earnings (or net income/profit, which are all the same thing) that have interest and taxes added back to them.  Because interest and taxes are “added back” we use the word “Before”, to explain this.

On an income statement, EBIT can be easily calculated by starting at the Earnings Before Tax line and adding to it any interest expenses the company may have incurred.

 

Breaking down EBITDA

To spell it out one more time, EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.   The adding back of Depreciation and Amortization is the only difference between EBIT vs EBITDA.

EBITDA can be harder to calculate on the income statement.  Depreciation and Amortization can be included in several spots on the income statement (in Cost of Goods Sold and as part of General & Administrative expenses for example) and therefore requires special focus.

The easiest way to ensure you have the full depreciation and amortization number is by checking the Cash Flow Statement, where they will be fully broken out.

 

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An example of EBIT vs EBITDA

The example below shows how to calculate EBIT and EBITDA on a typical income statement.

 

EBIT vs EBITDA EBIT example

 

We will take you through this example step by step so you can calculate each of these metrics on your own.

In EBIT example, let’s take the numbers in 2019 starting with Earnings, and then add back Taxes, and Interest.

The EBIT formula is:

EBIT = 39,860 + 15,501 + 500 = 55,861

In the EBITDA example let’s continue to use the 2019 data and now take everything from the EBIT example but add back 15,003 of Depreciation.

 

EBIT vs EBITDA EBITDA example

 

The EBITDA formula is:

EBITDA = 39,860 + 15,501 + 500 + 15,003 = 70,864

 

When to use EBIT vs EBITDA

There is a lot of debate about which metric is better, and lots of good arguments on both sides of the fence.

For a company or industry with relatively low capital expenditures required to maintain their operations, EBITDA can be a good proxy for cash flow.

In capital intensive industries like oil and gas, mining, and infrastructure, EBITDA is a near meaningless metric.  The extensive amount of capital spending required means that EBITDA and cash flow will often be very far apart.  In this case, EBIT may be more appropriate, as the Depreciation and Amortization captures a portion of past capital expenditures.

To see more on the topic, we have outlined why Warren Buffett does not like to use EBITDA.  As he put it, do people think the Tooth Fairy pays for capital expenditures?

 

Depreciation vs Capital Expenditures

Depreciation doesn’t perfectly correspond to capital expenditures, but it is analogous and represents a smoothed-out version of it over time.

Those in favor of EBIT explain that, over time, depreciation is relatively representative of capital expenditures (capex), and capex is required to run the business so it makes sense to look at earnings after depreciation.

On the other hand, capital expenditures can be extremely lumpy, and sometimes are discretionary (i.e. the money is spent on growth as opposed to sustaining the business).

Those in favor of EBITDA view capex as largely discretionary and therefore think it should be excluded.

 

Impact on valuation

Capital intensive industries will trade at very low EV/EBITDA multiples because their depreciation expense and capital requirements are so high. This means they could be a “value trap” to the untrained eye (i.e. they appear cheap, but actually are not).

EBIT multiples will always be higher than EBITDA multiples and may be more appropriate for comparing companies across different industries.

The key is to know your industry and which metrics are most common in it.

For true intrinsic value analysis, such as in financial modeling, EBITDA is not even relevant, as we rely entirely on unlevered free cash flow to value the business.

 

More financial analysis resources

We hope this has helped shed some light on the major differences of EBIT vs EBITDA.  If you want to keep exploring similar topics, we have a range of free resources that we believe will be extremely valuable to you in your career.

 

Relevant CFI resources include: