EBIT and EBITDA explained simply

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

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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All Comments

  • Thanks for making this simple to understand 😊

    naught na July 13, 2020 6:45 pm Reply
  • Perfectly understandable

    Gulbanoo Mussani July 13, 2020 6:45 pm Reply
  • Good explanation clearly delivered

    Philip Pieterse July 13, 2020 6:45 pm Reply
  • thankyouu

    Thot Doedoe July 13, 2020 6:45 pm Reply
  • You need to hire an artist

    Richard Humphrys July 13, 2020 6:45 pm Reply
  • Thanks for this, I lso wanted to know what is Adjusted EBITDA ? in a similar easy story telling way 🙂

    shanks008 July 13, 2020 6:45 pm Reply
  • Another excellent video.

    Pradeep Menon July 13, 2020 6:45 pm Reply
  • Thank you for making this!

    Diego Castro July 13, 2020 6:45 pm Reply
  • Simple yet great explanation on EBIT and EBITDA without the need to decipher accounting textbooks 📚🙏✌️

    Friderikas July 13, 2020 6:45 pm Reply
  • 🙂 I have no need to know what EBIT or EBITDA is, but I enjoyed watching this

    All Gravy July 13, 2020 6:45 pm Reply
  • EBITDA still sounds like something Latka from Taxi would say.

    MrDabag001 July 13, 2020 6:45 pm Reply
  • This was very explanatory! I finally get it, thanks!

    Ivan Hanák July 13, 2020 6:45 pm Reply
  • Really appreciate your videos. Always used when I want to get my fundamentals right

    Navaneetha Krishnan K July 13, 2020 6:45 pm Reply
  • 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.

    BE GOOD July 13, 2020 6:45 pm Reply
  • Quick and easy. Thanks for the review!

    Ti A July 13, 2020 6:45 pm Reply
  • Thats the best truck I ever seen!!!

    John K July 13, 2020 6:45 pm Reply
  • That is one beautiful truck

    santiago hernandez July 13, 2020 6:45 pm Reply
  • Simple and to the point. Good Video.

    Alex Hales July 13, 2020 6:45 pm Reply
  • 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.

    Robert Bell July 13, 2020 6:45 pm Reply
  • If I see Alec Baldwin’s stupid face again I’m throwing tomatoes at him

    Kory Vogel July 13, 2020 6:45 pm Reply
  • 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) ???

    huch moz July 13, 2020 6:45 pm Reply
  • Fantaistic – made so so simple! Thank you

    Dr Lucy, CPT July 13, 2020 6:45 pm Reply
  • Thanks for this 🙂

    Bubble Gum July 13, 2020 6:45 pm Reply
  • 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.

    pigslefats July 13, 2020 6:45 pm Reply
  • 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

    The Finance Storyteller July 13, 2020 6:45 pm Reply

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