EBIT & EBITDA Tutorial

Lesson note: The recording uses historical company statements. The written explanations below distinguish EBIT and EBITDA from cash flow and from operating income; the original video may use those terms more loosely.

Definition of EBIT and EBITDA

• EBIT stands for earnings before interest and taxes. 

• EBITDA stands for earnings before interest, taxes, depreciation, and amortization. 

EBIT and EBITDA are earnings measures used to compare profitability. Neither is a cash-flow measure: they do not capture all cash movements, such as changes in working capital or capital expenditures.

Calculating EBIT 

EBIT starts with net income and adds back interest and income taxes. EBITDA also adds back depreciation and amortization. Operating income is a separate subtotal and can differ from EBIT because of nonoperating items. Check the company's definitions and reconcile any non-GAAP measure to its comparable reported measure.

Operating income measures the profit from operations after operating expenses. It usually excludes financing costs and income taxes, but it should not automatically be substituted for a net-income-based EBIT calculation.

Calculating EBITDA

Calculate EBITDA from net income by adding back interest, income taxes, depreciation, and amortization. Reconcile the figures to the financial statements rather than assuming a shortcut from revenue or operating income gives the same answer.

However, there is an issue with that. Even though D&A is non-cash, it is derived from capital expenditures, which is a true expense, which is a true cash outlay. For that reason, many investors such as Warren Buffett don't like using EBITDA as a cash flow metric. 

Where to find D&A?

If D&A is not separately displayed on the income statement, check the cash-flow statement and notes. It may be included in cost of sales or other operating expenses. Use the relevant reporting period and do not assume every company has a material D&A amount.

Adjusted EBITDA

Adjusted EBITDA makes additional company-specific adjustments. Review each adjustment and the reconciliation to understand what is being excluded; companies' adjusted measures may not be comparable.

Dave & Buster's (PLAY)

Let's look at a couple of examples here. One from Dave & Buster's and one from Facebook. Let's calculate both of those companies, EBIT and EBITDA. Here I have the 10-K for Dave & Buster’s for the fiscal year ended February 2, 2020. The following figures are in thousands of dollars. 

The first example identifies income from operations in the historical filing. Treat that line as operating income. To calculate EBIT, start with net income and reconcile interest and income taxes, checking for nonoperating items that can explain a difference.

For EBITDA, add depreciation and amortization to the reconciled EBIT figure. The recording demonstrates where to locate D&A; use the same reporting period and avoid counting an amount twice.

Another way to calculate EBITDA is starting with net income and I could do it this way also 100,263. Add back interest of 20,937, taxes of 26,879, and D&A of 132,460.

The operating-income shortcut gives the same result only when the relevant nonoperating differences are absent or have been reconciled. The general bridge is net income plus interest, income taxes, depreciation, and amortization.

Facebook (FB)

Let's do the same thing for Facebook. I have Facebook's 10-Q for the quarter ended March 31, 2020 open. The following figures are in millions of dollars.

In the second historical example, the income statement reports operating income. Check the rest of the statement for nonoperating items before treating that line as EBIT. If D&A is not separately shown on the income statement, review the cash-flow statement and notes.

The historical cash-flow statement shows D&A of 1,597 in its stated units. Add the applicable amount to reconciled EBIT to calculate EBITDA, using figures from the same period.

Starting with net income, add back interest, income taxes, depreciation, and amortization. Do not automatically add back all other expenses; any further exclusions need a separately explained adjusted measure.

Recap & Learn More

EBIT and EBITDA can help compare earnings, but neither replaces analysis of cash flow, debt, or capital spending. Practice financial statements and valuation in financial modeling classes and related finance courses.