EBIT vs. EBITDA: What’s the difference?

As a small business owner, you may have heard the acronyms “EBIT” and “EBITDA” before. If you’re scratching your head about the EBIT or EBITDA meanings, or how they differ, you’re not alone. Both are metrics that a business can use to measure profitability. While they share a few similarities, their calculations will yield different results. So, what do these acronyms stand for?

• EBIT definition: Earnings before interest and taxes
• EBITDA definition: Earnings before interest, taxes, depreciation, and amortization

Both calculations take information from your business’s income statement, but provide two different outcomes. We’ll walk through what you need to know about EBIT vs. EBITDA when you see a reference to either term in a financial report.

Key differences between EBIT and EBITDA

Earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA) are two of the several metrics a business can use to measure profitability. The key difference between the two is that EBIT only looks at earnings before interest and taxes, excluding depreciation and amortization expenses. EBITDA factors in depreciation costs and amortization as well, giving a more inclusive view of profits coming from net income.

It’s important to note that neither EBIT nor EBITDA are approved metrics under U.S. Generally Accepted Accounting Principles (GAAP). Companies that must comply with GAAP cannot use these metrics to fulfill reporting requirements. However, many still choose to report them alongside other GAAP-approved metrics.

What is EBIT?

Earnings before interest and taxes (EBIT) is a business’s net income before business income taxes and interest payments. This metric is used to measure the operating profitability of a company. Both taxes and interest are cash expenses, but are not influenced directly by the business’s core operations. So, by taking out interest and tax expenses, EBIT can give insight into the business’s underlying, or “core,” profitability. Business owners or managers can analyze EBIT to get a better understanding of their business’s competitive position and attractiveness to investors. Investors or analysts generally use EBIT to compare companies that are in the same industry but that have different capital structures or that operate in different tax jurisdictions.

How to calculate EBIT

EBIT can be easily calculated using information on your profit and loss statement (also known as an income statement). There are two different EBIT formulas you could use:

1. EBIT = Revenue – Cost of Goods Sold – Operating Expenses

            NOTE: Cost of Goods Sold is often abbreviated to “COGS”

2. EBIT = Net Income + Interests + Taxes

What is EBITDA?

Earnings before interest, taxes, depreciation, and amortization (EBITDA) measures a business’s profits by removing depreciation and before factoring in the impact of its asset base to project earnings potential. Let’s take a step back and define depreciation and amortization: Depreciation is the reduction in value of a tangible asset over time due to wear and tear, discontinuance, or other factors. Depreciation is a practice that many businesses use to spread the cost of fixed assets over their useful lives. Amortization is the same practice, but for intangible assets (like a patent or trademark). Both result in a recurring expense deducted from the business’s revenue over several years.

EBITDA offers valuable insight into the profitability of a business’s operational performance before deductions for capital assets, interest, and taxes. EBITDA helps analyze profit and can help estimate cash flow. It is important to understand that EBITDA is not the same as cash flow under GAAP. For a clearer understanding of your business’s cash position, take a look at your cash flow statement.

How to calculate EBITDA

Like calculating EBIT, the EBITDA formula will be generated by information from your business’s financial statements. Again, there are two EBITDA formulas you can use:

1. EBITDA = Net Income + Interests + Taxes + Depreciation + Amortization
2. EBITDA = EBIT + Depreciation + Amortization

EBIT vs. EBITDA: Calculation example

Let’s take a look at some sample calculations for a small business using the different formulas for EBIT and EBITDA.

EBIT:

For this calculation, let’s assume a small business has the following information on their income statement (aka P&L statement) for the year:

• Revenue: $300,000
• COGS: $150,000
• Operating Expenses: $100,000
• Net Income: $30,000
• Interest Expenses: $10,000
• Taxes: $10,000

Here’s what the calculation would look like using both of the above formulas:

1. EBIT = Revenue – COGS – Operating Expenses

            EBIT = 300,000 – 150,000 – 100,000 = 50,000

2. EBIT = Net Income + Interests + Taxes

            EBIT = 30,000 + 10,000 + 10,000 = 50,000

As you can see, regardless of the EBIT calculation formula used, the EBIT for this business is $50,000.

EBITDA:

For this calculation, let’s assume a small business has the following information on their P&L statement (aka income statement) for the year:

• Net Income: $30,000
• Interest Expenses: $10,000
• Taxes: $10,000
• Depreciation Expense: $5,000
• Amortization Expense: $2,000
• EBIT: $50,000

Here’s what the calculation would look like using both formulas above:

1. EBITDA = Net Income + Interests + Taxes + Depreciation + Amortization

            EBITDA = 30,000 + 10,000 + 10,000 + 5,000 + 2,000 = 57,000

2. EBITDA = EBIT + Depreciation + Amortization

            EBITDA = 50,000 + 5,000 + 2,000 = 57,000

Again, using either EBITDA calculation formula, the EBITDA for this business comes to $57,000.

What about EBT?

One more acronym you may see alongside EBIT and EBITDA is EBT. As you may be able to guess, EBT stands for earnings before taxes. EBT reflects the operating profit before accounting for just taxes. Honestly, it’s not a commonly requested calculation. Businesses don’t usually calculate the EBT without also calculating the EBIT or EBITA. Investors may use EBT to evaluate a business’s performance after eliminating tax liabilities, which are largely outside of its control. This is sometimes helpful when comparing businesses that have different state and federal business tax requirements.

Get small business tax help from Block Advisors

Does understanding the different financial metrics your business can use feel overwhelming? If you’d rather spend more time on the parts of your business you actually like, or just want an expert to help you wrap your brain around these and other concepts, Block Advisors can help.

Let our experts lighten your load, in person or virtually, year-round – as always – backed up by the Block Advisors guarantees. Our taxes, bookkeeping, payroll, and incorporation services are designed with small business owners like you in mind.

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This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations.