ebit vs ebitda

EBIT stands for earnings between income and taxes. It denotes the operating earnings, profit, or income that accrues to a firm when you subtract the expenses from revenue, without accounting for tax and interest. EBITDA takes the equation a step further by removing depreciation and amortization, which are non-cash items.

What distinguishes EBIT and EBITDA, is depreciation and amortization. In the first instance we include, and in the latter, exclude, depreciation and amortization. In either case, the endeavor is to try and estimate a base level of cash flow accruing from the business. The two main components of arriving at this base level of cash flow happen to be the profits from the business, as well as the day to day investments required by the business to obtain these cash flows. This is the capital expenditure that the company requires to undertake to reach the level of profitability. EBIT incorporates depreciation and amortization, (non cash items). These act as estimates of capital expenditure. EBITDA does away with depreciation and amortization, and only focuses on the profitability of a company. It does not pay attention to the investment needed to attain the profitability.

EBITDA is sometimes preferred over EBIT, because for some firms that have very little capital expenditure, the figure does not really matter. There are those who do not agree with this contention, though. The advantage of EBIT over EBITDA pertains to the fact that, to an extent, it compensates for capex through depreciation. This depreciation figure, more often than not, is really a mellowed measure of capex, as it concerns itself with items purchased over many years. So in reality, EBIT is a better representative of real earnings.

However, EBITDA can be better utilized when analysing businesses within the same industry, where the capex to revenue ratios happen to be similar. All in all, EBIT and EBITDA are acronyms that define tools that financial wizards use to tell the effect, and to show the financial health of the company. As to which one is more advantageous, is best left to them.

Summary:

EBIT denotes the operating earnings, profit, or income that accrues to a firm when you subtract the expenses from revenue, without accounting for tax and interest. EBITDA goes a step further by removing depreciation and amortization, which are non-cash items.

In EBIT, we include, and in EBITDA exclude, depreciation and amortization.

EBITDA is sometimes preferred over EBIT by some firms that have very little capital expenditure.

The advantage of EBIT over EBITDA pertains to the fact that, to an extent, it compensates for capex through depreciation. EBITDA can be better utilized when analysing businesses within the same industry, where the capex to revenue ratios are similar.