EBIT represents the approximate amount of operating income generated by a business, while EBITDA roughly represents the cash flow generated by the operations of a business. The EBIT acronym stands for Earnings Before Interest and Taxes; by removing interest and taxes from net income, the financing aspects of an entity are separated from its operations. The EBITDA acronym stands for Earnings Before Interest, Taxes, Depreciation and Amortization; by additionally removing depreciation and amortization from the EBIT calculation, all non-cash expenses are deleted from operating income.
Thus, the differences between the two measures are as follows:
- EBIT reveals the accrual basis results of operations, while EBITDA gives a rough approximation of the cash flows generated by operations.
- EBITDA is more likely to be used to develop a company valuation for acquisition purposes, since such valuations are usually based on cash flows.
- EBITDA is more likely to be used in the analysis of capital intensive firms or those amortizing large amounts of intangible assets. Otherwise, the depreciation and/or amortization expense can overwhelm their net earnings, giving the appearance of substantial losses.
Neither calculation is allowed to be included in the income statement under generally accepted accounting principles. Instead, they are separately calculated and are not part of the financial statements.