EBIT and EBITDA explained simply

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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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48 COMMENTS

  9. Simple yet great explanation on EBIT and EBITDA without the need to decipher accounting textbooks 📚🙏✌️

  14. 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.

  19. 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.

  21. 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) ???

  24. Don't understand why depreciation and interest would be excluded, notwithstanding your explanation. Revenue to the extent it is reported would not be generated without the capital and finance (cost of which is depreciation and interest) These are relevant expenses.

  25. Lots of exciting and helpful new videos coming up! Be sure to click the like button, subscribe and turn on notifications to ensure you don't miss anything. Learn more by watching my EBITDA example video https://www.youtube.com/watch?v=7e_6qEo1grI and my EBITDA calculation video https://www.youtube.com/watch?v=eH4ex5q_j1w and my EBITA video https://www.youtube.com/watch?v=nImp51zYcy4

  27. Should companies focus more on EBITDA as one of their main financial metrics? Yes/no? Why? Let me know by commenting below.

  28. currently writing a report for uni and i can honeslty say that I learnt more from this video than my lecturer, and shes amazing!! great work

  36. This was very informative and simple.  It was very helpful to understand what I thought would be a complicated theory of understanding.  Thank you.  It is greatly appreciated.

  46. THANK YOU for this meaningful video,I don't know anything about finance,I have been working for my company for 10 years now and they've sent us what I assume to be a shortened version of Annual Report in which Growth has been experienced.

    Our CEO mentioned EBITDA in the newsletter,because this is new to me I quickly googled what this EBITDA means and your channel was the first in line,needless to say how impressed I am by the simple form of explanation.

    I may not be a financial/accounting guru but I got a rough sketch to what's happening in the business.After watching this video I think I'm going to school to learn how to read Balance Sheet and Income Statement Account.

    Thank you once again.

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