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, the differences in their calculations can lead to varied results.
- 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.
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 structure influencing profit.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is another widely used indicator to measure a company's financial performance and project earnings potential. EBITDA reflects the profitability of a company's operational performance before deductions for capital assets, interest, and taxes.
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. Since depreciation 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.
Note that EBIT and EBITDA are also different from earnings before taxes (EBT), which reflects the operating profit that has been realized before accounting for taxes. EBT is calculated by taking net income and adding taxes back in to calculate a company's profit.
By removing tax 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 companies that might have different state taxes or federal taxes. EBT and EBIT are similar to each other and differ in the inclusion of interest expenses.
EBIT vs. EBITDA Example
Below is a portion of the income statement for McDonald'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).