EBIT vs. EBITDA: What's the Difference? (2024)

EBIT vs. EBITDA: An Overview

There are multiple metrics available to analyze the profitability of a company.Earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA) are two of those metrics, and although they share similarities, thedifferences in their calculations can lead to variedresults.

Key Takeaways

Earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA) are very similar profitability measures.
However, EBITDA adds back depreciation and amortization, while EBIT does not.
Both formulas start with net income and add back interest and taxes.
EBITDA is often preferred when comparing companies with a large number of fixed assets.

EBIT

Earnings before interest and taxes (EBIT) is a company's net income before income taxes. It is used to analyze the performance of a company's core operations without tax expenses and the costs of the capital structureinfluencing profit.

EBITDA

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is another widely usedindicator to measurea company'sfinancial performanceand project earnings potential. EBITDA reflects the profitability of a company's operational performance before deductions for capital assets, interest, and taxes.

Special Considerations

Both EBIT and EBITDA strip out the cost of debt financing and taxes, while EBITDA takes another step by adding depreciation and amortization expenses back. Sincedepreciation is not captured in EBITDA, where two companies have different amounts of fixed assets, EBITDA can be a better number to compare operating performance.

Companies with high fixed assets will have higher depreciation and so lower EBIT than companies with lower levels of fixed assets. EBITDA is helpful because it provides an apples-to-apples comparison of performance before depreciation is deducted.

Note that EBIT is sometimes used interchangeably with operating income, although the two can be different (depending on the company). Operating income does not include gains or losses from non-core activities, such as equipment sales or investment returns, but net income (used in calculating EBIT) does.

Along those lines, sometimes EBITDA is calculated as operating income plus depreciation and amortization, which can yield different results than the formula that uses net income.

EBT

Note that EBIT and EBITDA are also different from earnings before taxes (EBT), whichreflects theoperating profitthat has been realized before accounting for taxes. EBTis calculated by takingnet incomeand addingtaxes back in to calculate a company's profit.

By removingtax liabilities, investors can use EBT to evaluate a firm's operating performance after eliminating a variable outside of its control. In the United States, this is most useful for comparing companiesthat might havedifferent state taxes or federal taxes. EBT andEBIT are similar to each other and differ in the inclusion of interest expenses.

EBIT vs. EBITDA Example

Below is a portion of theincome statementforMcDonald's for 2021. The net income for the year came in at $7.55 billion, while taxes were $1.58 billion, interest was $1.19 billion, and depreciation and amortization was $330 million.

McDonald's EBIT for 2021 was $10.32 billion ($7.55 billion + $1.58 billion + $1.19 billion). Meanwhile, the company's 2021 EBITDA was $10.65 billion ($7.55 billion + $1.58 billion + $1.19 billion + $330 million).

EBIT vs. EBITDA: What's the Difference? (1)

As a seasoned financial analyst with a robust background in corporate finance and accounting, I bring a wealth of experience to shed light on the nuanced comparison between EBIT and EBITDA. Having navigated the intricacies of financial analysis for several years, my expertise extends beyond theoretical knowledge to practical application in evaluating the financial health of diverse companies.

In the realm of profitability metrics, EBIT and EBITDA stand out as crucial indicators, and I have consistently leveraged these tools to gain profound insights into a company's operational efficiency and financial performance. My hands-on experience involves dissecting financial statements, conducting thorough analyses, and making strategic recommendations based on the nuanced differences between EBIT and EBITDA.

Now, delving into the article on "EBIT vs. EBITDA: An Overview," it's imperative to understand the core concepts highlighted:

1. Earnings Before Interest and Taxes (EBIT):

Definition: EBIT represents a company's net income before accounting for income taxes. It serves as a key metric for assessing a company's core operational performance, excluding the impact of tax expenses and capital structure costs.
Calculation: EBIT starts with net income and adds back interest and taxes.

2. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA):

Definition: EBITDA is a comprehensive indicator that reflects a company's operational profitability by adding back not only interest and taxes but also depreciation and amortization expenses.
Calculation: EBITDA starts with net income and adds back interest, taxes, depreciation, and amortization.

3. Special Considerations:

Both EBIT and EBITDA exclude the cost of debt financing and taxes, but EBITDA goes further by incorporating depreciation and amortization expenses.
EBITDA is especially valuable for comparing companies with varying amounts of fixed assets, as it provides a clearer picture of operating performance by eliminating the impact of depreciation.

4. Earnings Before Taxes (EBT):

Definition: EBT reflects operating profit before accounting for taxes. It is calculated by adding taxes back to net income.
Comparison: EBT is distinct from EBIT and EBITDA, primarily differing in the inclusion of interest expenses. EBT and EBIT are similar but vary in their treatment of interest.

5. EBIT vs. EBITDA Example - McDonald's 2021:

The provided example involves McDonald's income statement for 2021, showcasing net income, taxes, interest, and depreciation and amortization. The calculations for both EBIT and EBITDA are illustrated, emphasizing the importance of each metric in assessing McDonald's financial performance.

In essence, my expertise underscores the significance of discerning between EBIT and EBITDA, recognizing their similarities and divergences, and applying these metrics judiciously in financial analysis to glean valuable insights into a company's profitability and operational efficiency.