What is EBIT?
EBIT (which stands for Earnings Before Interest & Taxes) is another indicator of a company’s profitability. EBIT is similar to EBITDA, which is also an indicator of a company’s underlying profitability. EBIT is also known as a company’s Operating Profit.
So, what’s the difference between EBIT and EBITDA?
As you might have guessed, the answer lies in the “DA” part of the acronym. EBIT takes into account non-cash expenses (Depreciation and Amortization).
EBIT therefore gives us an idea of the company’s profitability after taking into account things like the depreciation of machinery used to produce the firm’s products. This kind of large machinery and other equipment is usually purchased with an initial cost and then used over several years - think about a crane for a construction company, an oil rig drill for an oil company or labs and medical equipment for a healthcare company. The company doesn’t buy a new one each year, but depreciation accounts for the wear-and-tear of these things over time as the company will need to replace with newer equipment at some point in future.
EBITDA on the other hand does not take into account these non-cash expenses. It is comparable to a company’s operating cash flow - or the money it earns by operating its business model as it is (not taking into account things like machinery which depreciate over a long time period and need to be replaced at some point in the future).
EBIT is usually included in the income statement which is part of a company’s earnings results, and is sometimes referred to as Operating Profit. If you’re ever in doubt - the following calculations should help guide you to the right number:
EBIT = Revenue - Operating Expenses (see below for operating expenses!)
EBIT = Net Income (a.k.a. Earnings) + Interest + Taxes
We’ve provided a simple income statement for your reference below, which might help you to visualise the equations above as well as other key earnings metrics and how they relate to each other.
Generalised Income Statement
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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