EBITA vs EBIT and EBITDA

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!

⏱️TIMESTAMPS⏱️
0:00 Introduction
0:19 EBIT vs Operating Income
0:39 Why companies report EBITA
1:16 Why companies report EBITDA
1:50 How EBIT, EBITA and EBITDA fit into the P&L
2:18 From net income to EBITDA
2:55 EBIT-EBITA-EBITDA calculation
3:40 EBIT-EBITA-EBITDA definition

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.

Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[percevalzinzin]

Crystal clear, exactly the content I was looking for!!!

[ezkape]

Incredible clear and undesrtandable. My company will change to EBIT rather than internal measurings, this will help me a lot to understand this.

[yek]

Thank u so much for your help! From korea!

[hacker]

This is good quality content. Thank you!

[SuryaBudimansyah]

EAT: Umm when is my turn? I wanna have some vs too!
Comprehensive Income: Patience, kid. They don't know who they're messin' with
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Can't think of better joke, greetings from newcomer on the channel :)

[Overthought]

The last section relates each accounting category to an aspect of the business, but WHY is it okay (and even useful) to exclude these things? Doesn't that give you a skewed perspective of a company? Furthermore, doesn't this kind of logic allow us to say that ANY arbitrary cost category X should be excluded from an earnings metric because "it depends on aspect Y of the business"? What makes these 4 categories (ITDA) special? Edit: I found a helpful comment on another video: "EBITDA is an operating performance metric that allows for peer-to-peer comparison of performance, regardless of geography and investment structure. I don’t believe EBITDA is a valuation metric and it shouldn’t be viewed as one." (I was thinking it was a valuation metric)