EBIT vs EBITDA

Difference Between EBIT vs EBITDA

EBIT stands for Earnings before Interest and Taxes which appears in the Company’s Income Statement. When Costs of Materials, labor, Rent, employees costs, Depreciation and other costs are deducted from Income or Revenue the Profits which we get is called Earnings before Interest and Taxes (EBIT) or the Operating Income of the Company. Basically, all the operating expenses in relation with the Business are deducted from Income and the residue is Operating profit. Operating profit denotes the operational efficiency of a company- how well the costs (primarily operating) are being managed and the degree of it is being measured by the Operating profit margin. Operating profit margin, we can get by Operating Profit as a percentage of Sales. It is believed that the higher the rate of operating profit margin denotes better efficiency of the Management.

For example, when Operating profit margin improves from 18.8% in a particular Financial Year from 17% in comparison to previous year, it is believed that the company has taken certain measures to reduce operating costs and it replicates from the Operating Margin and vice versa. EBITDA, on the other hand, stands for Earning before Interests Taxes and Depreciation and Amortization which can also be extracted from any company’s Income Statement. So when Depreciation is not included within the operating expense we get EBITDA. Sometimes analysts prefer to exclude depreciation expense because there is no cash transaction is involved during depreciation. Only the intrinsic value of the fixed assets gets erode, whereas the real cash remains within the Balance sheet and circulates within the working capital itself. So when the amount of depreciation charged is added back we get EBITDA.  But in the case of Capital intensive business like Telecom, Real estates, Airlines etc. depreciation does impacts higher than any other Business say Information Technology and FMCG. This is because the higher amount of fixed assets are involved in it. Thus the difference between EBITDA margin and EBIT margin would be higher for a capital-intensive business. Thus, the real earning can be visible when EBITDA is taken into account.

A study of Income statement of Jubilant Foodworks would through light on the course of Business during the last two years.

The above example indicates that the EBITDA margin has expanded from 10% to 15% in FY18 from FY17 which is a 50% improvement. But the EBIT margin has improved from 4% to 10% which 2.5% improvement because of the ‘Depreciation; which has been taken in to account. Depreciation increased from INR 1512 million in FY17 to INR 1559 million in FY18 which is a jump of 23.35%. And the margin has been improved drastically.

EBIT vs EBITDA Infographics

Below is the top 5 difference between EBIT vs EBITDA

Key Differences between EBIT vs EBITDA

Both EBIT vs EBITDA are popular choices in the market; let us discuss some of the major Difference Between EBIT and EBITDA:

• EBIT is a measurement of operational efficiency with the inclusion of Depreciation/amortization within the operating expenses whereas EBITDA is the measurement of operational efficiency without the Depreciation/amortization, thus the erosion from fixed assets and intangible assets are not excluded as it’s a non-cash item.
• The primary factor is the Depreciation or amortization; the higher the depreciation/ amortization the wider the gap between EBIT vs EBITDA. In the case of less capital-intensive businesses, the EBIT vs EBITDA margin almost remains the same.
• EBITDA margin is a worthy indicator of operational efficiency in the case of sectors like Telecommunications, Aviation, Real Estates etc as a huge amount of non-cash items are involved in these kinds of the business. Thus the real income, in most of the cases is overshadowed if the Depreciation is deducted.
• Change in depreciation methods may give certain different results when both EBIT vs EBITDA are calculated. As we know Depreciation/amortization is the prime factor; a sudden change in the amount of Depreciation can hinder the past ratios too.

Head To Head Comparison Between EBIT vs EBITDA

Below is the Topmost Comparison Between EBIT vs EBITDA

EBIT vs EBITDA – Final Thoughts

Both EBIT vs EBITDA ratios are the key indicators in determining the operational efficiency of a Business. A comparatively higher margin from historic years determines the better operational efficiency of the company. Thus if the Depreciation remains the same and the company is deriving higher Revenues with same or lower amount of expenses, then the Company is increasing is operational efficiencies with better cost management and higher revenues can be indicative of good product-mix. Additions of high margin product are what a business looks for and it indicates higher pricing power from the clients or the customer on the basis of higher customer royalty.

Recommended Article

This has a been a guide to the top difference between EBIT and EBITDA. Here we also discuss the EBIT vs EBITDA key differences with infographics, and comparison table. You may also have a look at the following articles to learn more –

1. The Most Valuable Intangible Assets?
2. Stocks vs Shares Differences
3. Buying vs Leasing
4. Debt vs Equity Comparisons
5. Future vs Option Differences
6. Stocks vs Mutual Funds: What are the differences