EBIT, EBITA and EBITDA – differences

EBIT
Earnings Before Interest & Taxes.
EBITA
Earnings Before Interest, Taxes & Amortisation.
EBITDA
Earnings Before Interest, Taxes,  Depreciation & Amortisation.

EBIT

EBIT is an abbreviation for Earnings Before Interest & Taxes. To calculate EBIT, you take the net profit and consequently deduct expenses and income that come from interest and taxes. EBIT is the same thing as operating income.

When calculating the value of stocks/companies, EV/EBIT is often used as a key performance indicator. EV stands for Enterprise Value (the company’s market capitalization minus net debt). When you divide EV with EBIT you get a multiple

EBITA

EBITA stands for Earnings Before Interest, Taxes & Amortisation. The difference compared to EBIT is that you also deduct amortisation expenses from the net profit.

Amortisation refers to the excess value you get when you buy another company for a price that is higher than the company’s net asset value. If Company A buys Company B for $10 million and Company B only has a net asset value of $8 million, Company A may write down $2 million as an amortisation expense.

EBITA ensures that usage and depreciation of fixed assets are recognised as actual expenses, and subsequently affect the financial performance.

EBITA is best used to analyze companies that has a lot of intangible assets, like finance companies. Many consider EBITA to be the best measure of showing a company’s financial performance.

EBITDA

EBITDA stands for Earnings Before Interest, Taxes,  Depreciation & Amortisation. The difference compared to EBITA is in other words that you also deduct depreciation of machines, inventories, and fixed assets. EBITDA can be compared to gross profit. That generally means that it shows a higher profit than the two previous measurements (EBIT and EBITA).

Which of the measurements are best?

It is impossible to say which one of the above-mentioned measurements works best for valuing a company or stock. It all depends on which type of company and industry you look at. EBIT is more relevant in some industries, while EBITA and EBITDA are best in other instances.

In this video the finance storyteller tells you more about the measurements