EBIT vs EBITA vs EBITDA: Key Differences and Impact on Financial Analysis

Financial data helps determine the difference between a company’s revenue and expenses. This means it can show how much a company earns. In reality, though, it’s not that simple, and in practice, different terms are used to describe profit. Stay with us as we explain some of these: EBIT, EBITA, and EBITDA.

Company activity segments

Are you wondering what the terms EBIT, EBITA, and EBITDA mean? Before we explain how these indicators differ, you need to understand the segments of a company’s operations. Below is a general breakdown – it’s essential when it comes to corporate finance:

• Core operational activity. Activities related to the main goal of the company. Depending on the company’s profile, this could include manufacturing products or providing services.

• Other operational activity. Activities not directly related to the company’s profile, such as selling fixed assets or paying compensation (as these are one-off, exceptional events).

• Financial activity. Includes things like repaying loan interest or income/expenses related to issuing bonds.

Only by considering all three of these areas can you truly determine a company’s financial result. Especially for larger companies with thousands of transactions each year, simple data about revenue minus expenses may not be reliable, which is why various profit definitions are used. EBIT, EBITA, and EBITDA are popular variants.

Profit comes in many forms

There is no single, universal way to correctly calculate a company’s profit in a way that fully reflects its performance. EBIT, EBITA, and EBITDA are popular approaches, but they highlight how different the concept of profit can be.

EBIT a simple indicator, but is it complete?

One of the most popular indicators describing a company’s financial health is EBIT (Earnings Before Interest and Taxes), which is calculated based on the core operational activity. How do you calculate EBIT? To do so, subtract all costs from the company’s revenue, except for a few exceptions. When calculating EBIT, the following are excluded:

• Loan interest,

• Taxes.

This means that EBIT represents the profit from a company’s core operational activity. While it’s widely used, it’s not always the best indicator.

EBIT shows how a company is performing in its core business. However, since it doesn’t include financial costs (like interest), using EBIT for analysis can sometimes lead to incorrect conclusions. This happens, for example, when a company has bank loans, and rising interest rates increase costs – this is not reflected in EBIT.

On the other hand, a significant advantage of EBIT is that it excludes tax burdens, making it useful for comparing companies operating in different countries (as tax systems can vary significantly between nations).

EBITA

EBITA (Earnings Before Interest, Taxes, and Amortization) is a modified version of EBIT. So, what’s the difference? Here’s the answer: EBITA excludes:

• Loan interest and taxes (like EBIT), and

• Amortization of intangible assets (this includes assets like trademarks, patents, etc.).

EBITA makes it easier to assess how a company is doing (or in comparative analysis – how different companies are doing) without considering one-off events, such as purchasing a patent.

EBITDA

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is another indicator used to show how much a company earned during a specific period. EBITDA is essentially EBITA with the addition of depreciation of fixed assets.

Amortization vs. depreciation – what’s the difference? Both terms refer to accounting costs (not actual expenses) that reflect the gradual wear and tear of assets. The difference is that amortization refers to intangible assets, while depreciation applies to fixed assets (e.g., machinery).

Why is EBITDA calculated? The answer is simple: depreciation costs – a portion of the cost of purchasing or producing a fixed asset – are accounting deductions, not actual expenses. EBITDA, which excludes any depreciation, better reflects a company’s “true” profitability, ignoring accounting operations that don’t involve real cash flow.

However, this doesn’t mean EBITDA always gives a complete picture of a company’s financial health. It’s important to remember that this metric excludes investment costs, which can be high and necessary for a company’s growth.

Many companies, such as those in construction or manufacturing, need to invest in machinery, buildings, or vehicles. Unfortunately, EBITDA doesn’t reflect this, as it ignores depreciation costs.

FAQ

1. What’s the difference between EBIT, EBITA, and EBITDA?

EBIT is profit before interest and taxes, while EBITA also excludes amortization of intangible assets. EBITDA further excludes depreciation of fixed assets.

2. When should you use EBITDA?

EBITDA is useful for assessing operational profitability, especially in companies with high depreciation costs (such as in the manufacturing sector). However, keep in mind that EBITDA does not include investment costs.

3. Why can EBIT lead to incorrect conclusions?

EBIT overlooks financial costs (including loan interest). In companies with high debt, this indicator may not provide a full picture of the financial situation.