The difference between EBIT and EBITDA
/What is EBIT?
EBIT represents the approximate amount of operating income generated by a business. The EBIT acronym stands for Earnings Before Interest and Taxes; by removing interest and taxes from net income, the financing aspects of an entity are separated from its operations. The end result is a good measure of the profitability of an organization’s core business operations.
The information used to derive the EBIT number can be found near the bottom of an organization’s income statement. In many cases, this exact description is stated on the income statement, likely because management wants to use the EBIT number for its own internal reporting purposes.
What is EBITDA?
EBITDA roughly represents the cash flow generated by its operations. The EBITDA acronym stands for Earnings Before Interest, Taxes, Depreciation and Amortization; by additionally removing depreciation and amortization from the EBIT calculation, all non-cash expenses are deleted from operating income.
The information used to derive the EBITDA number can be found in several places on an organization’s income statement. As noted earlier, the EBIT part of the number may be stated in a separate line item. In addition, the depreciation and amortization figure may be aggregated into a single line item, making it quite easy to calculate the EBITDA number.
Comparing EBIT and EBITDA
Based on the preceding information, the differences between EBIT and EBITDA are as follows:
EBIT reveals the accrual basis results of operations, while EBITDA gives a rough approximation of the cash flows generated by operations.
EBITDA is more likely to be used to develop a company valuation for acquisition purposes, since such valuations are usually based on cash flows.
EBITDA is more likely to be used in the analysis of capital intensive firms or those amortizing large amounts of intangible assets. Otherwise, the depreciation and/or amortization expense can overwhelm their net income, giving the appearance of substantial losses.
Neither calculation is allowed to be included in the income statement under generally accepted accounting principles. Instead, they are separately calculated and are not part of the financial statements. They are more likely to be used by an outside analyst who is reviewing the historical performance of a business.