What is the difference between EBIT vs. EBITDA?
EBIT and EBITDA are relatively similar metrics, but ultimately provide a snapshot of a company's financial health. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is very similar to the amounts included in a typical EBIT calculation. The biggest difference is that EBIT excludes depreciation and amortization of fixed assets like equipment and buildings.
EBITDA can offer a more accurate impression of a company's operating profit than EBIT, especially for companies with a substantial number of fixed assets.
However, because EBITDA doesn't take earnings after depreciation into account, it can distort how companies with substantial fixed assets are actually performing. The larger the depreciation expense, the bigger the EBITDA.
The EBIT formula allows you to assess the performance of the core business model. It only focuses on business operations and nothing else. On the other hand, EBITDA measures the cash flow of the business.
In EBITDA, depreciation and amortization are actual representations of the value lost as assets like property and equipment age. These losses don't involve the firm spending actual money, but are considered losses nonetheless.
An EBIT analysis will tell you how well a company can do its job, while an EBITDA analysis estimates the cash spending power of a company.
EBITDA is useful in companies that have heavy capital investments. Although different, both EBIT and EBITDA are critical in estimating essential analysis tools. Both are not GAAP-approved metrics and don't appear in an income or cash flow statement. But accountants will often use them to determine a business' overall financial standing.
Both EBIT and EBITDA are equally important. Determining which calculation makes the most sense for your business depends on your industry or the purpose of your analysis. EBITDA is better suited for capital-intensive and leveraged companies. Such companies typically carry high debt loads and have substantial fixed assets, which often translates to poor earnings.
Analysts also use EBITDA for valuing such companies because negative earnings can make it complicated to determine the company's financial situation.