In this tutorial, we're going to review EBIT and EBITDA using real examples from Facebook and Dave & Busters.
Definition of EBIT and EBITDA
EBIT stands for earnings before interest and taxes.
EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
These are both cash flow metrics used by financial analysts to evaluate the profitability of companies.
EBIT is calculated as net income plus interest plus taxes. Alternatively, you can start with revenue and subtract operating expenses. Just make sure not to subtract interest in taxes even as also known as operating income.
What's the significance of operating income? Operating income shows the profitability from a company's operations, not including finance, considering considerations such as interest or taxes, which is not an operating expense.
Let's move on to EBITDA. EBITDA is calculated as net income plus interest plus taxes plus depreciation and amortization. Alternatively, you could start with revenue and not subtract interest, taxes, and D&A. What's the significance of EBITDA? Since D&A is a non-cash expense, financial analysts like to add it back.
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?
Another important question, if you don't see D&A on the income statement, does the company have D&A? Yes, the company still has D&A and it's just buried in another line item on the income statement may be cost of sales or some other operating expense item. So what do you do to get the D&A? You go to the statement of cash flows in the cash flows from operations section and you could add it back from there.
What is meant by adjusted EBITDA? That takes even that one step further and adds back certain items that a company doesn't feel reflects its true cash flow, such as the restructuring charge. Note that this is a company-specific adjustment and for that reason, it may not be that reliable, but it is still widely used by companies and financial analysts.
Dave & Busters (PLAY)
Let's look at a couple of examples here. One from Dave and Busters and one from Facebook. Let's calculate both of those companies, EBIT and EBITDA. Here I have the 10-K for Dave and Busters.
Let's start with the EBIT. EBIT is just going to be equal to income from operations. And that's operating income here. It's one hundred and forty-eight 0 7 9. I don't really have to do much to get a company's EBIT.
Let's now go to EBITDA. I could just take the operating income and add back D&A. 1/32 for 60 so I could take the EBIT and add back D&A and that's the easiest way to get EBITDA.
Another way to calculate EBIDTA is starting with net income and I could do it this way also 100 million to sixty-three. And add back interest. That's twenty-nine thirty-seven. Add back taxes. And add back D&A.
And you'll see that our answer is the same. So either you can start with operating income and add back D&A or you could start with net income and add back interest taxes, depreciation, and amortization.
Let's do the same thing for Facebook. I have Facebook's latest 10-Q open.
And I'm going to the income statement, and it's very easy to calculate their operating income because it has its own line item here. So that's the company's EBIT. Next, let's calculate their EBITDA and I look here and I don't see D&A anywhere. Cost of revenue, R&D, marketing, and sales, G&A. It's not there. So where is it?
I scroll down to the cash flow statement in cash flows from operating activities. I can see D&A right there, 15 ninety-seven. So I'm going to take that plus fifteen ninety-seven. And that's my EBITDA.
Again like we did for Dave and Busters. You could have started with net income, adding back taxes, adding back interest and other expenses, and then adding back D&A and you would get to the same answer.
Recap & Learn More
In summary, even in EBITDA, our cash flow metrics are useful but used by financial analysts and they're not too difficult to calculate from a company's financial statements as we showed with a couple of examples here. To continue learning with hands-on examples like this join us in our financial modeling Bootcamp, finance courses, or accounting courses.