What is EBIT and EBITDA?
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Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a widely used measure of core corporate profitability. EBITDA is calculated by adding interest, tax, depreciation, and amortization expenses to net income.
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Earnings before interest and taxes
Earnings before interest, taxes, depreciation, and amortization.
Removing these give a better idea of the profitability of the core operations of a business.
EBIT is Earnings Before Interest and Taxes. It’s a measure that is useful because it tries to correct for differences in profitability that arise by different income treatments of different financing (interest is an expense, dividends are not an expense.
EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a very quick and dirty estimate of operating cash flow, which is useful when one business is considering buying another business, or someone wants to use debt to finance purchasing the business and wants the operating cash flow to make the debt payments.
EBIT gives you an idea of your core business profits. You don’t worry about interest and taxes but what’s left at the end of the day? It’s your operating profits.
EBITDA is even more so, because the depreciation is really a paper loss as it’s sunk, so it’s really a cash flow number. It’s your earning potential outside of cost of capital.
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