EBITDA and EBIT are two key ratios used to assess a company's earning capacity, but they show slightly different perspectives on operations.
What is EBIT?
EBIT stand for Earnings Before Interest and Taxes – in Danish: result before interest and tax. It shows how much a company earns from its operations after operating costs have been deducted, but before financial items (e.g. interest) and tax are taken into account.
EBIT is often used as an expression of actual operating earnings because it shows what the business itself generates, regardless of how the business is financed.
What is EBITDA?
EBITDA stand for Earnings Before Interest, Taxes, Depreciation and Amortization – in Danish: result before interest, tax, depreciation and write-downs. It is an extension of EBIT, where depreciation and write-downs are also disregarded.
By removing these items, EBITDA provides a picture of the underlying operating earnings without influence from investments in, for example, buildings, machinery, intangible assets or previous investments that are depreciated over time.
The difference between EBIT and EBITDA
- EBIT = Operating profit before interest and tax (but after depreciation).
- EBITDA = Operating profit before interest, tax and depreciation (gives a "cleaner" picture of operations).
EBIT shows how the company's operating activities are performing including the effect of investments and depreciation. EBITDA shows a more "cash-based" earnings as it ignores non-cash items.
When are they used?
EBITDA is often used in comparisons across companies and industries because it neutralizes differences in depreciation methods and investment levels. It is also popular in connection with valuation (e.g. EV/EBITDA multiples).
EBIT is used when you want to look at the actual operating result and include the depreciation that naturally follows from the company's assets. It gives a more realistic picture of the long-term sustainability of earnings.
Example
A company has:
- Turnover: 10 million DKK
- Driftsomkostninger (ekskl. afskrivninger): 6 mio. kr.
- Afskrivninger: 1 mio. kr.
EBITDA = 10 - 6 = 4 mio. kr.
EBIT = 10 - 6 - 1 = 3 mio. kr.
Kort opsummering
EBITDA gives a picture of earnings without depreciation, while EBIT includes these. The choice of ratios depends on whether you want to focus on the underlying operation (EBITDA) or take into account the importance of the investments (EBIT).