EBIT vs EBITDA: What's the Difference? - YouTube

Hey there I'm James you're watching Accounting  Stuff and in this video i'll explain what EBIT and  

EBITDA both mean how you can calculate them and  why they're important

if you're one of my regular viewers then you might have noticed that i'm sat on a different sofa and that's because i've moved

yep i've been living in Vancouver for the last  few years but now i'm in Sydney which is actually  

where i used to live before i lived in Vancouver  that's a fun fact for you

anyways let's jump right in what do EBIT and EBITDA both mean? EBIT and EBITDA are two ways of measuring a business's  

profitability they are both acronyms EBIT stands  for earnings before interest and taxes and EBITDA  

is very similar it stands for earnings before  interest, taxes, depreciation and amortization  

so where can you find EBIT and EBITDA on financial statements? they both live in the income statement

this is the financial statement which summarizes a businesses revenues and expenses over a period of time

revenue less expenses is profit and  like i mentioned EBIT and EBITDA are both

measures of profitability so how can we calculate EBIT? EBIT stands for earnings before

interest and taxes and when we say earnings we  mean profit you can find a business's net profit  

on the bottom line of income statement so this is  going to be our starting point for the calculation  

before means that we're going to add back and  what are we going to add back? 

interest and tax interest expenses are the cost of borrowing  money it's a non-operating cost so it sits below

operating profit and tax expenses are what the  business reckons it owes to the local tax authority  

for this accounting period so we can  calculate EBIT earnings before interest  

and taxes by taking a business's net profit and  adding back the interest and tax expenses this  

is our formula and we'll come back to it in  the example but how can we calculate EBITDA?  

it's a very similar process EBITDA means  earnings before interest, taxes, depreciation and  

amortization so we start with net profit and add  back interest and taxes just like we did for EBIT

but this time we're going to go a step further by  adding back depreciation and amortization as well  

depreciation expenses are the cost of reducing  the book value of tangible assets those are assets  

that you can touch this is because of use wear  and tear the passing of time or obsolescence and  

amortization is very similar it's the cost  of reducing the book value of intangible  

assets assets that you can't touch so EBITDA  earnings before interest, taxes, depreciation and  

amortization is equal to a business's net profit  plus interest expenses and tax expenses plus any  

depreciation and amortization incurred during the  year time for an example Firkenflop is a company  

that makes sandals which can be paired with  woolly socks for a sublime combination of comfort  

and style here's their income statement for the  year ended 31st of december how do we calculate  

Firkenflop's EBIT their earnings before interest  and taxes well we know that EBIT is equal to net  

profit plus interest expenses and tax expenses  during the year Firkenflop made a net profit  

of 1.21 million dollars so if we add back their  interest expense of 140 thousand dollars and their tax  

expense of two hundred and fifty thousand dollars  then Firkenflop's EBIT is 1.6 million  

dollars simples but hold on a moment there's an  easier way 1.6 million dollars is exactly the same  

as Firkenflop's operating profit this is no  coincidence because EBIT and operating profit are  

the same thing most of the time anyway now that  we've done and dusted EBIT how can we calculate  

Firkenflop's EBITDA their earnings before  interest, taxes, depreciation and amortization  

EBITDA is equal to net profit plus interest  expenses plus tax expenses plus depreciation  

plus amortization Firkenflop made a net profit of  1.21 million dollars so we need to add back their  

interest expense of 140,000 dollars their tax expense  of 250,000 dollars and on top of all of this we add back  

their depreciation and amortization of one million  dollars that means that Firkenflop has an EBITDA  

of 2.6 million dollars given that EBIT and  operating profit are almost always the same  

a shortcut to working this out would be to say  that EBITDA is equal to operating profit plus  

depreciation and amortization Firkenflop has an  operating profit of 1.6 million dollars so if we  

add back their depreciation and amortization  incurred for the year of one million dollars  

then we can see that their EBITDA is 2.6 million  dollars the same as we had before if you find  

it hard to remember these equations for EBIT and  EBITDA then you can support this channel by buying  

my profitability ratios cheat sheet the links in  the description but hold up what if you want to  

work out EBITDA but you can't find depreciation  or amortization in the income statement  

this can happen from time to time depreciation  might be wrapped up in cost of goods sold if it's  

linked to production of inventory if that's the  case then there's no need to fret take a peek at  

the business's cash flow statement instead if it's  been prepared under the indirect method which is  

very likely then depreciation and amortization can  be found under cash flow from operating activities  

they're both added back to net profit since  they are non-cash expenses now we know what EBIT  

and EBITDA both stand for, what they mean, where to  find them and how to calculate them that leaves  

just one more question why do we bother?  why can't we use net profit to measure profitability?

the problem with net profit is that it's been  influenced by indirect variables that sit outside  

of a business's core operations for example  interest is the cost of borrowing money which is  

determined by a business's capital structure and  tax it varies by location maybe we want to compare  

companies that are based in two different states  or countries if we remove all these interest and  

tax expenses then we're left with EBIT which keeps  the focus on the business's operating efficiency  

EBITDA goes one step further it ignores  depreciation and amortization which are the costs  

of capital investments if we strip them out as  well then you can get a feel for how much profit  

the business is able to make doing what it does  like selling sandals in the case of Firkenflop  

and since depreciation and amortization are both  non-cash expenses EBITDA is also a quick way to  

estimate if a business can pay its debts when they  fall due huge thanks to all my channel members for  

supporting Accounting Stuff your contributions  are greatly appreciated see you in the next one