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EBITDA, EBIT & Operating Profit - Explained in Hindi | #22 Master Investor - YouTube
Channel: Asset Yogi
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Namaskar, my name is Mukul, and welcome to Asset Yogi
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where we unlock the knowledge of finance.
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In this video, we are going to talk about EBIT and EBITDA.
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If we talk about its full form then EBIT is
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Earnings Before Interest and Taxes.
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And EBITDA is
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Earnings Before Interest, Taxes, Depreciation, and Amortization
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You get both of these metrics from your income statement.
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And if you investing in stock, then these become very important metrics
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because you can compare companies at an operational level.
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Now see, every company
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can take a different type of loans, their amount can be different
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so their interest could also be different.
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Similarly, suppose some company's assets are very old so
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maybe its depreciation would have increased.
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So maybe net profit is not the right metric.
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To do the whole comparison.
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You should see net profit too.
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Along with that, it is also important to see EBITDA and EBIT.
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And there are some ratios as well
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which uses EBIT and EBITDA.
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I will also talk about those ratios in the upcoming videos.
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In this video mainly we will understand the concept of EBIT and EBITDA.
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Along with that, we will also see an operating profit.
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That is exactly what is operating profit.
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A lot of times people get confused about this,
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some think of EBITDA as operating profit.
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Some say EBIT is operating profit.
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Yes if we talk practically,
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EBIT could be considered operating profit in a lot of places.
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But there are some minor differences, I will talk about that in this video,
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so do watch this video till last
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Let's head straight to the blackboard.
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Let's take an example to understand EBIT and EBITDA.
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Suppose there is a shoe manufacturing company,
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so generally three statements are formed,
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three financial statements.
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One is your balance sheet,
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In which you write assets and liabilities.
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Now assets are mainly of two types, fixed assets,
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in which you get the value in cash one year later,
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for example any real estate or building
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or any plant and machinery, equipment, or vehicles come in this.
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Current assets are those which you can convert to cash in under a year.
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In the same way, liabilities could also be long-term and short-term.
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Long-term liabilities are those which you need to pay after a year.
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And current liabilities are those which you need to pay under a year.
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So assets and liabilities come under the balance sheet.
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The second financial statement is your income statement,
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which we also refer to as p&l statement.
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Profit and loss statement.
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It is very simple here, expenses are deducted from revenue and you get profit.
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Yeah this could happen that there could be different heads under revenue
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and there could be a different types of expenses under expenses.
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We will learn about it in detail in a while.
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And after that what you get as profit goes directly into an asset as a form of cash.
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So this, your cash reserve keeps on increasing
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and in this way your asset increases.
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The third statement is your cash flow statement.
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Cash flow statement in a way is your bank account statement
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that how much money flow in and out.
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So cash in and cash out is written in it.
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Cash in could be in any form.
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If you are getting your income, it could come in form of revenue
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or if you took a loan.
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In whatever form cash is coming in your account is cash in.
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In whatever form your cash got out may it be in the form of expenses or interest,
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that is cash out and the net cash flow left in the bank that is your net cash flow.
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So broadly these are your three financial statements.
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Now EBIT and EBITDA is
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a metric of your profit or loss statement.
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That tells you
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that which company stock would be good for you
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which company is performing better at the operational level.
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Let's understand this in detail.
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Suppose we want to see the income statement
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of this shoe manufacturing company.
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So let's say it has revenues of 2 crore Rupees.
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In a year.
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And the cost of goods sold, meaning the cost of manufacturing shoe
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it comes to be of Rs 40 lakh in a year.
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So when you subtract the cost of goods sold from revenue, you get gross profit.
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So when you subtract Rs 40 lakh from Rs 2 crore, you get Rs 1 crore 60 lakh.
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After that suppose there are some operating expenses such as
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suppose marketing and sales expenses are of Rs 20 lakh,
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office and admin expenses are 30 lakh.
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So you subtract this from gross profit.
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So you get EBITDA.
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So when you subtract these operating expenses then
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what is the full form of EBITDA?
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Earnings Before Interest, Taxes, Depreciation, and Amortization.
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So I will explain to you what are these heads,
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and what do they mean?
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So let's move on to the income statement.
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You subtract depreciation and amortization from EBITDA.
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Suppose depreciation is Rs 10 lakh and amortization is zero.
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Now, in what way is this depreciation of Rs 10 lakh?
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Let me tell you this with an example.
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Let say
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This company has an asset of Rs 2 crore.
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Here I'll write assets.
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And here I will
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divide how this asset of a total of Rs 2 crore is formed.
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Let's say for this Rs 2 crore asset you took a debt/ loan of Rs 1.6 crore.
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And the rest Rs 0.4 crore or Rs 40 lakh is equity, equity means
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Either investors or promoters invested money from their pocket
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or the company itself put money from their cash reserves.
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So that was Rs 40 lakh.
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Now this debt of Rs 1.6 crore, over this interest is needed to be paid per annum.
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And secondly, these assets of Rs 2 crore,
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will depreciate.
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Every year they are depreciated.
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Suppose this building or plant and machinery has some life.
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You will depreciate that, suppose I will also
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for convenience, suppose this building and plant and machinery
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have one life, let's suppose have equal life.
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Now what will you do is, when you want to calculate depreciation,
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to Rs 2 crore you will,
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2 crore 1,2,3,4,5,6 has 7 zeros.
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You will divide this by 20 years.
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This much depreciation you will get of 1 year.
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This is your Rs 10 lakh.
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So like this Rs 10 lakh will be depreciated which you will subtract.
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For this case let's suppose amortization to be zero.
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I will explain to you the difference between depreciation and amortization in a video.
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So let's move on,
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when you subtracted depreciation and amortization from EBIDTA.
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So you get EBIT.
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You subtracted Rs 10 lakh from Rs 1 crore 10 lakh.
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Your EBIT comes out to be
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Rs 1 crore.
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When you subtract interest from this,
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Interest like I said, Rs 1.6 crore debt was taken to make assets,
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This interest needs to be subtracted.
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Suppose interest comes out to be Rs 20 lakh in a year.
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When you subtract it, you get profit before taxes.
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So we got profit before tax of Rs 80 lakh.
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Then let's say tax rate, I am taking approximately to be 30%,
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So 30% of 80 lakh is Rs 24 lakh.
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If you subtract, then you will get a net profit.
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Your net profit turns out to be Rs 56 Lakhs.
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Now see if you want to calculate EBIT or EBITDA,
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So you can do this reverse too, suppose net profit is given, you know the net profit.
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So for calculating EBIT,
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add interest and tax portion into the net profit.
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So if you will add Rs 24 lakh and Rs 20 lakh to Rs 56 lakh you will again get EBIT.
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Similarly for calculating EBITDA
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In net profit along with interest and tax,
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you can add depreciation and amortization portions to it.
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So you,
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will add interest and tax to Rs 56 lakh.
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and along with that, you will add depreciation and amortization, so again
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you will end up with a figure of Rs 1 crore 10 lakh EBIDTA.
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So this was for calculation of EBITDA and EBIT,
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is calculated this way.
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Now let's try to understand what do they mean.
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How are these users to use?
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Now see, when you see the net profit of a company
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and compare it with another company,
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so that does not tell you the whole story of it.
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Because the interest portion of every company could be different.
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Tax portion could also be different
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if you are comparing international companies together.
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Then your depreciation and amortization could also be different.
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Depreciation could also be different as maybe some companies already have
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depreciated assets and very old assets.
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So for that
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for that their profit margin would be more.
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So, for this reason, we want to compare companies only at the operation level,
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therefore if you compare companies at the EBITDA level, that is a better metric.
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So basically what we are trying to say is
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whatever non-operation expenses you have, remove it and
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you compare only at the operational level,
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because interest is a financial structure.
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It could happen that some companies have taken a lot of loans
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and some companies took none.
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The tax could defer, it depends on geography.
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Depreciation and amortization could also be different,
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because depreciation depends on past investments.
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Some companies have old assets, some have new ones.
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So what we want to do with EBIT and EBITDA
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we want to create a level playing field with EBIDTA.
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That is when we compare two companies.
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We only compare them at an operational level
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that, the company which does its main work
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which is the best company at their work.
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We want to compare which company does its work the best.
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That you find at EBIT or EBITDA level.
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And we take EBIDTA for which companies?
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We take EBITDA for capital-intensive companies where there are a lot of assets.
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For example in manufacturing, a lot of plant & machinery and real estate
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are present, also oil and has to have a lot of plant & machinery.
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And telecom too similarly is a very capital-intensive industry.
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We can take EBIT for which companies?
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We generally take it for services industry like
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your technology companies and consulting companies.
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or any other kind of service industry.
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Because depreciation and amortization
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doesn't matter a lot for the service industry
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their main assets are their employee,
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and employees are not depreciated, only your fixed assets
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are depreciated.
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So EBIT and EBITDA are
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are used in a lot of ratios.
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When we do financial analysis, then I'll talk about this in upcoming videos.
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And keep in mind one more thing that we also call EBIT loosely as operating profit.
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Because all the revenue that you are getting from operations and from that
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if you subtracted expenses,
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So you get operating profit.
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Now see depreciation and amortization are non-operating
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expense and non-cash expense, and for that reason
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we call EBIT as operating profit loosely.
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A lot of time people also call EBITDA as operating profit loosely,
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but that is wrong to say.
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And EBIT is also not operating profit.
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Let me explain to you the minor difference between that as well.
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So see now suppose if this was the income statement then definitely,
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EBIT would be operating profit in this case because all the revenue in this
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is coming from operations.
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Now let's try to add some variations to it.
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Suppose the revenue operation, this revenue
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is coming from two ways, suppose from operations
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we are getting Rs 1 crore 80 lakh.
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And the rest income supposes there were some capital gains.
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Let's say sold some real estate,
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sold a small real estate or sold some plant and machinery
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or maybe received income from interest, from any investment.
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So that is your other income that does not come from operations
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so let it be Rs 20 lakh.
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Your total income let's say is Rs 20 crore.
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And the rest is as it is.
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Okay so in this way we saw our income statement.
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So now see here, this other income that there is,
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could now be included in operating profit.
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So basically what would you do if you want to
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calculate operating profit in cases like this?
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You will subtract non-operating profit from EBIT to get operating profit.
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So this non-operating income will get reduced because this
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here it's added, see here when you are calculating EBIT,
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then this Rs 20 lakh has been added to it.
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Along with that if there are any non-operating assets
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so that you will add back again
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because suppose you subtract any non-operating asset.
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So that should not have been included, so you need to add back those.
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So if we will calculate operating profit in this case then
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EBIT is Rs 1 crore, so let's write Rs 1 crore here.
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And we will subtract non-operating income, so this other income of Rs 20 lakh
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we will subtract that.
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And your operating profit, in this case, would come out to be Rs 80 lakh.
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So I think after watching this video, this EBIT and EBIT-DA which we call EBITDA
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and operating profit, you understood the difference between these three.
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And you understood the usefulness of these.
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Now in upcoming videos, we will see how these are used in ratios.
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And how you can make your financial analysis better, when you
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compare any company at the operational level.
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So this much only in this video,
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I had a lot of fun making this video.
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If you also liked this video, then do like and share this video.
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If you have any suggestions or want to suggest any topic for future videos,
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or if you want to share any other though with the community,
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so you can comment down below.
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And if you haven't subscribed to this channel yet.
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Then subscribe to this channel below
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and press the bell icon so that you get the notifications of my latest videos.
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Because I share this type of finance and investment-related
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informative video on this channel daily.
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So let's meet in the next video.
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Till then keep learning, keep earning, and stay happy.
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