EBIT and EBITDA

The profitability and efficiency of a company can be analyzed by different measurement techniques, which help stakeholders like investors to compare various companies performing in a single industry. EBIT and EBITDA are the examples of such measures, which are used to gauge the operational efficiency of the company.

EBIT (Earnings before Interest and Taxation)

EBIT is the mnemonic for “Profit before Interest and Tax” of a company, being the performance indicator, It indicates the profit being earned from business activities of the company. It is very informational and helpful in understanding and analyzing any company’s operational affectivity, ignoring its cost of capital and taxation impact on profit.

EBIT provides information to compare the operating performance of the companies in a single industry. It can be understand by summing up operating income and non-operating income, where operating income is net of revenue less operating expenses.

EBIT (also known as PBIT) is the sum of all operating income as well as non-operating income, here in an example, it does not include any financial impact of the business and neither will it include the taxation impact.

  Revenue  52,410
            Less: Cost Of Sales (27,445)
 Gross Profit  24,965
          Less:  Selling, General And Admin Expenses  (9,867)
         Less:  Depreciation and Amortization  (8,855)
 Operating Income   6,243
        Interest Expenses(no calculation for the EBIT)   9,493
      Add:  Interest Income   9,985
    Add:   Other Non-Operational Income 18,750
PBIT or EBIT 34,978

EBITDA (Earnings before Interest, Taxation, Depreciation and Amortization)

Just like the EBIT, EBITDA is also an analyzing tool for the measurement of the operational performance of any company, however, it does not account for the non-cash items, unlike the EBIT. It also ignores the impact of the cost of capital and tax factors. It is free of expenses like interest cost, tax cost, depreciation, and amortization.

It can be understood by the following example

  Revenue  52,410
            Less: Cost Of Sales (27,445)
 Gross Profit  24,965
          Less:  Selling, General And Admin Expenses   (9,867)
         Depreciation and Amortization(non cash item)   8,855
 Operating Income 15,098
        Interest Expenses(no calculation for the EBIT)   9,493
      Add:  Interest Income   9,985
    Add:   Other Non Operational Income 18,750
EBITDA 43,833

In this calculation of EBITDA, the impact of tax, finance cost and non-cash expenses are not taken into account for.

Difference between EBIT and EBITDA

Basis of Difference

EBIT

EBITDA

Meaning Profitability of a company in which

all expenses are taken into account

except for interest and tax.

Profitability of a company in which

all expenses are taken into account except for interest, tax depreciation, and amortization.

Represents Results are based on

accruals basis

Results are based on cash flow basis
Formula Revenue-operating expenses Revenue-operating expenses (Excluding depreciation and amortization)
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