What is the meaning of EBIT, EBITA and EBITDA?
Which companies use EBIT?
Which companies use EBITA?
Which companies use EBITDA?
How do you calculate EBIT, EBITA and EBITDA?
Let’s find out!
A lot of companies, and a lot of financial analysts, talk about EBIT:
Earnings Before Interest and Taxes.
EBIT is a proxy for the more official GAAP term called Operating Income.
If a firm does not have non-operating income and non-operating expenses,
then Operating Income is the same as EBIT.
Some companies find the non-GAAP term EBITA a more meaningful financial metric to report
on current financial performance.
If a company has done significant acquisitions in the past, then the current income statement
of the company may have a significant charge (expense) related to amortization of acquired
intangible assets.
An example of acquired intangible assets can be tradenames.
If these are judged to have a definite rather than an indefinite life, then an annual amortization
charge is booked.
Reporting on EBITA rather than EBIT excludes this amortization charge.
There is a third metric in heavy use: EBITDA.
Companies that have a significant historical fixed asset base
may find this a meaningful metric.
If a company has done significant investments in fixed assets in the past, then the current
income statement of the company may have a significant charge (expense) related to depreciation
of these tangible assets.
An example of a tangible asset is a building or a machine.
Reporting on EBITDA rather than EBIT or EBITA excludes this depreciation charge.
Let’s see how EBIT, EBITA and EBITDA fit into the P&L (Profit and Loss statement) or
income statement.
A P&L is usually viewed from the top down.
You start with revenue (the “top line”)
and make your way down to net income (the “bottom line”).
If you look at the financial metrics EBIT, EBITA and EBITDA, you reverse the direction
of your analysis.
You start with net income and work your way up in the direction of revenue.
Let’s walk through step by step how to get from net income to EBITDA.
If you add back corporate income tax expense to net income, you get to EBT:
Earnings Before Taxes.
If you add back interest expense to EBT, you get to EBIT:
Earnings Before Interest and Taxes.
If you add back amortization expense to EBIT, you get to EBITA:
Earnings Before Interest, Taxes and Amortization.
If you add back depreciation to EBITA, you get to EBITDA:
Earnings Before Interest, Taxes, Depreciation and Amortization.
Let’s do that one more time, but now with some numbers for illustration.
If you add back corporate income tax expense of 20 to net income of 80,
you get to Earnings Before Taxes of 100.
If you add back interest expense of 10 to EBT of 100,
you get to Earnings Before Interest and Taxes of 110.
If you add back amortization expense of 15 to EBIT of 110,
you get to Earnings Before Interest, Taxes and Amortization of 125.
If you add back depreciation of 25 to EBITA of 125,
you get to Earnings Before Interest, Taxes, Depreciation and Amortization of 150.
If you understand the definition of EBITDA, you automatically understand
EBT, EBIT and EBITA.
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
Earnings is the same as income or profit.
The word “before” suggests that we are excluding certain items from our operational
performance metric.
Interest is excluded, as it depends on your financing structure.
How much did you borrow, and at what interest rate?
Taxes are excluded, because it depends on the geographies that you work in.
Depreciation is excluded, as it depends on the historical fixed asset investment decisions
that a company has made.
Amortization is excluded, as it depends on the acquired intangible assets that may have
been created in making acquisitions in the past.
I hope you enjoyed this explanation of EBIT, EBITA and EBITDA,
and the relationship between them.
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