There are multiple metrics available to analyze the profitability of a company.聽EBIT and EBITDA are two of those metrics, and although they share similarities, the聽differences in their calculations can lead to varied聽results.聽

EBIT

Earnings before interest and taxes (EBIT) is a company's net income before income tax expense聽and interest expense have been deducted.聽EBIT is used to analyze the performance of a company's core operations without tax expenses and the costs of the capital structure聽influencing profit.

The following formula is used to calculate EBIT:聽

EBIT=NI聽+聽IE聽+聽TEwhere:NI聽=聽Net聽incomeIE聽=聽Interest聽expenseTE聽=聽Tax聽expense\begin{aligned} &\text{EBIT}=\text{NI + IE + TE}\\ &\textbf{where:}\\ &\text{NI = Net income}\\ &\text{IE = Interest expense}\\ &\text{TE = Tax expense}\\ \end{aligned}EBIT=NI聽+聽IE聽+聽TEwhere:NI聽=聽Net聽incomeIE聽=聽Interest聽expenseTE聽=聽Tax聽expense

Since net income is a figure that doesn't include interest expense and tax expense, they need to be added back to calculate聽EBIT.锘柯

EBIT is often referred to as operating income since they both exclude taxes and聽interest expenses聽in their calculations. However, there are times when operating income can differ from EBIT.

EBT

Earnings before tax (EBT)聽reflects the聽operating profit聽that has been realized before accounting for taxes, while EBIT聽excludes both taxes and interest payments. EBT聽is calculated by taking聽net income聽and adding聽taxes back in to calculate a company's profit.

By removing聽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聽that might have聽different state taxes or federal taxes. EBT and聽EBIT are similar to each other and are both聽variations of EBITDA.

EBITDA

EBITDAor earnings before interest, taxes, depreciation, and amortization is another widely used聽indicator to measure聽a company's聽financial performance聽and project earnings potential.

EBITDA strips out debt聽financing as well as depreciation聽and聽amortization聽expenses when聽calculating profitability. It also excludes聽taxes and聽interest expenses on debt.锘柯燗s a result, EBITDA helps to drill down to the profitability of a company's operational performance.

EBITDA can be calculated by taking net income聽and adding back聽interest, taxes, depreciation, and amortization whereby:

EBITDA=NP聽+聽I聽+聽T聽+聽D聽+聽Awhere:NP聽=聽Net聽profitI聽=聽InterestT聽=聽TaxesD聽=聽DepreciationA聽=聽Amortization\begin{aligned} &\text{EBITDA}=\text{NP + I + T + D + A}\\ &\textbf{where:}\\ &\text{NP = Net profit}\\ &\text{I = Interest}\\ &\text{T = Taxes}\\ &\text{D = Depreciation}\\ &\text{A = Amortization}\\ \end{aligned}EBITDA=NP聽+聽I聽+聽T聽+聽D聽+聽Awhere:NP聽=聽Net聽profitI聽=聽InterestT聽=聽TaxesD聽=聽DepreciationA聽=聽Amortization

Comparing EBIT and EBITDA

Below is a portion of the聽income statement聽for聽JC Penney's as of May 5, 2018.聽

JC Penney's EBIT:

  • Net income was a loss for -$78聽million, highlighted in blue.
  • Interest expense was $78聽million while tax expense聽was a $1聽million credit, highlighted in green.
  • EBIT was -$1聽million聽for the period or -$78聽million聽(net income) -聽$1聽million (taxes) + $78聽million (interest).
  • Since income tax聽was originally a credit of $1 million, we deducted it back out to calculate EBIT.
Consolidated Statement
J.C. Penney / Securities and Exchange Commission聽

JC Penney's EBITDA is calculated using net income as well:

  • Net income was -$78 million,聽highlighted in blue.
  • Depreciation was $141 million, highlighted in red.聽聽
  • Net interest expense was聽$78 million while taxes were +$1 million,聽highlighted in green.锘柯
  • EBITDA was $140聽million聽or -$78 million + $141 million聽- $1 million + $78 million (net interest).
  • Again,聽income tax聽was originally a credit of $1聽million, so we deducted it back out to calculate EBITDA.聽
Consolidated Statement
J.C. Penney / Securities and Exchange Commission

We can see from the example above聽that EBIT of -$1 million was entirely different from the EBITDA figure of $140 million. For JC聽Penney,聽depreciation and amortization add a significant amount to profits under EBITDA.

Considerations with EBIT and EBITDA

Both EBIT and EBITDA strip out the cost of debt financing and taxes, while EBITDA takes it another step by putting depreciation and amortization expenses back into the profit of a company.

Since聽depreciation is not captured in EBITDA, it can lead to聽profit distortions for聽companies聽with a sizable聽amount of聽fixed assets and subsequently substantial depreciation expenses. The larger the depreciation expense, the more it will boost EBITDA.聽

EBITDA can also be calculated by taking operating income聽and adding back depreciation and amortization. Please note that each EBITDA formula can result in different profit numbers.聽The difference between the two EBITDA calculations may聽be explained by the sale of a large piece of equipment or investment profits, but if that inclusion is not specified explicitly, this figure can be misleading.聽

The Bottom Line

EBIT and EBITDA are both important metrics in analyzing the financial performance of a company. The differences in profitability in our example shows the importance of using聽multiple聽metrics in the analysis.聽