EBIT and EBITDA explained simply



What do EBIT and EBITDA mean? How to calculate EBIT and EBITDA? Why are the financial metrics EBIT and EBITDA important to measure the financial success of a company? Why do some companies use EBIT (Earnings Before Interest and Taxes) and others EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)? What is the purpose of the financial statements of a company: income statement, balance sheet, and cash flow statement? What are EBIT and EBITDA used for in business?

Both EBIT and EBITDA are measures of profitability, along with terms like gross profit and net income. They are reported in the income statement (or “Profit & Loss statement”, “P&L”), an overview of the profit or income that you generate during a period.

To calculate EBIT and EBITDA, many companies would present their income statement in the following way:
Revenue minus Cost Of Sales equals Gross Profit.
Gross Profit minus S,G&A and R&D equals EBITDA.
EBITDA minus Depreciation & Amortization equals EBIT.
EBIT minus Interest and Taxes equals Net Income.
Please be aware that different companies use different terminology, so what you see here might be different from what your company is using.

EBIT is Earnings Before Interest and Taxes. Interest is excluded, as it depends on your financing structure. How much did you borrow, and at what interest rate? Taxes are excluded, because it depends on the geographies that you work in.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. Just like EBIT, it excludes Interest and Taxes. Furthermore, depreciation and amortization are excluded, because they depend on the historical investment decisions that a company has made, not the current operating performance.

EBITDA is a meaningful metric for capital-intensive industries.

In the video, we look at an example of using EBIT and EBITDA in financial reporting, by reviewing the 2015 annual report of the Maersk Group (CPH: MAERSK-B), a company headquartered in Denmark and operating globally.

What do business and finance people use EBITDA for? Besides being a metric to represent ongoing operating performance, it is often mentioned as part of M&A (or Mergers & Acquisitions) news. A quick-and-dirty way to calculate the value of a company is by using a multiple of EBITDA. This can help you to get to a ballpark number, but I would advise to always do a more thorough analysis and a more thorough valuation of a company, as there are a lot of “ifs” connected to using an EBITDA multiple… you are assuming the profitability and the industry does not change, you exclude the impact of working capital (which could go up dramatically for a fast-growing company), and you exclude the cash that you need for capital expenditures on an ongoing basis for the company.

Related videos in the Finance Storyteller series:
EBITDA example
EBIT-EBITA-EBITDA

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!

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Comments

  • thankyouu

    Thot Doedoe June 20, 2020 1:18 pm Reply
  • You need to hire an artist

    Richard Humphrys June 20, 2020 1:18 pm Reply
  • Thanks for this, I lso wanted to know what is Adjusted EBITDA ? in a similar easy story telling way 🙂

    shanks008 June 20, 2020 1:18 pm Reply
  • Another excellent video.

    Pradeep Menon June 20, 2020 1:18 pm Reply
  • Thank you for making this!

    Diego Castro June 20, 2020 1:18 pm Reply
  • Simple yet great explanation on EBIT and EBITDA without the need to decipher accounting textbooks 📚🙏✌️

    Friderikas June 20, 2020 1:18 pm Reply
  • 🙂 I have no need to know what EBIT or EBITDA is, but I enjoyed watching this

    All Gravy June 20, 2020 1:18 pm Reply
  • EBITDA still sounds like something Latka from Taxi would say.

    MrDabag001 June 20, 2020 1:18 pm Reply
  • This was very explanatory! I finally get it, thanks!

    Ivan Hanák June 20, 2020 1:18 pm Reply
  • Really appreciate your videos. Always used when I want to get my fundamentals right

    Navaneetha Krishnan K June 20, 2020 1:18 pm Reply
  • Thank you . It's easy to understand. Even some words are too difficult for me to catch as my mother language is not English. But in general this video is very helpful. Thank you so much.

    BE GOOD June 20, 2020 1:18 pm Reply
  • Quick and easy. Thanks for the review!

    Ti A June 20, 2020 1:18 pm Reply
  • Thats the best truck I ever seen!!!

    John K June 20, 2020 1:18 pm Reply
  • That is one beautiful truck

    santiago hernandez June 20, 2020 1:18 pm Reply
  • Simple and to the point. Good Video.

    Alex Hales June 20, 2020 1:18 pm Reply
  • Though often shown on an income statement, it is not considered part of the Generally Accepted Accounting Principles (GAAP) by the SEC. In other words, it is bullshit.

    Robert Bell June 20, 2020 1:18 pm Reply
  • If I see Alec Baldwin’s stupid face again I’m throwing tomatoes at him

    Kory Vogel June 20, 2020 1:18 pm Reply
  • Could anyone please englighten me on whether the interest in the EBIT or EBITDA refers to interest expenses only or both the interest expenses & interest income (i.e. net of interest) ???

    huch moz June 20, 2020 1:18 pm Reply
  • Fantaistic – made so so simple! Thank you

    Dr Lucy, CPT June 20, 2020 1:18 pm Reply
  • Thanks for this 🙂

    Bubble Gum June 20, 2020 1:18 pm Reply

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