EBITDA and EBIT are two core metrics used to assess a company’s profitability, but they show slightly different perspectives on operations.
What is EBIT?
EBIT stands for Earnings Before Interest and Taxes, also known as profit before interest and tax. It shows how much a company earns from its operations after operating costs have been deducted, but before taking financial items (e.g. interest) and tax into account.
EBIT is often used as a measure of underlying operating profit, because it shows what the business generates regardless of how the company is financed.
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, also known as earnings before interest, tax, depreciation and amortisation. It is an extension of EBIT, where you also disregard depreciation and write-downs.
By removing these items, EBITDA provides a view of underlying operating earnings without the impact of investments in, for example, buildings, machinery, intangible assets, or past 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 (provides a "cleaner" view of operations).
EBIT shows how the company’s operating activities perform, including the effect of investments and depreciation. EBITDA shows a more “cash-based” earnings figure, as it excludes non-cash items.
When are they used?
EBITDA is often used in comparisons across companies and industries because it neutralises differences in depreciation methods and investment levels. It’s also popular for valuation (e.g. EV/EBITDA multiples).
EBIT is used when you want to look at actual operating profit and include the depreciation that naturally follows from the company’s assets. It provides a more realistic picture of the long-term sustainability of earnings.
Example
A company has:
- Revenue: DKK 10 million
- Operating costs (excl. depreciation): DKK 6 million
- Depreciation: DKK 1 million
EBITDA = 10 - 6 = DKK 4 million
EBIT = 10 - 6 - 1 = DKK 3 million
Quick summary
EBITDA provides a view of earnings excluding depreciation, while EBIT includes it. The choice of metric depends on whether you want to focus on underlying operations (EBITDA) or account for the impact of investments (EBIT).