What are EBIT and EBITDA?

EBIT

Earnings Before Interest and Taxes (EBIT), with its meaning in Portuguese “Profit Before Interest and Taxes”, is a measure of the organization’s profit.

In Brazil, this result is presented in the income statement for the year through LAJIR, or also, Profit Before Interest and Income Tax.

From the EBIT values, it is possible to know the company’s real profit in its operating results, including depreciation and amortization.

EBIT and EBITDA

Depreciation and amortization do not imply monetary outflows from the company’s cash, but rather an accounting measure for wear and tear, for example machines, which generate income.

The inclusion of these values ​​in the calculation is what differentiates it from Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), in Portuguese “Profits before Interest, Taxes, Depreciation and Amortization”.

EBIT represents the difference between the company’s income and expenses in the period, that is, the gains and losses in order to carry out the core activity. Its value serves as a basis to know how the company’s operation is going, not to mention the gains or losses in interest or income tax payable.

The EBITDA value is the most viewed by those who are only interested in knowing the organization’s performance in carrying out its main operations.

What is EBITDA?

The acronym EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization, which is the translation of the English expression Earnings before Interest, Taxes, Depreciation and Amortization.

The EBITDA calculation allows to know how much the company is generating cash based exclusively on its operating activities, disregarding the financial and tax impacts.

This financial indicator, also known as EBITDA, is widely used by publicly traded companies and analysts, since it allows verifying the company’s real performance in a given period without the influence of factors that are difficult to measure.

Advantages of using EBITDA

EBITDA is more accurate for measuring business productivity and efficiency than its final result. For example, when comparing the evolution of this indicator, an analyst is able to know if a company has become more efficient from one year to the next, without the influence of external factors.

The indicator is useful, for example, to measure the performance of indebted companies, since the charges that these companies need to pay can greatly reduce their profit or even result in losses. When looking at EBITDA, it is possible to see if the company is being productive and efficient, which indicates the potential to pay its bills and generate cash in the future.

Likewise, a negative EBITDA means that the company’s operation is not being profitable. This does not mean, however, that it is necessarily having losses in its final result, since it may be making gains, for example, with the return on investments.

In addition, EBITDA is also useful for international comparisons between companies, since each country has different tax regimes and different formulas for calculating depreciation and amortization.

Limitations on the use of EBITDA

Despite the importance of EBITDA, in order to have a general idea about a company’s performance, it is necessary to combine its analysis with that of other indicators. This is because EBITDA can give a false idea about the financial health of the company and its liquidity.

By definition, this indicator does not consider, for example, depreciation. Therefore, if the company’s machinery is very obsolete, requiring a large investment in its renovation in the short term, this cannot be predicted through EBITDA.

By disregarding the financial effects, EBITDA may include revenue not yet received or expenses in debt, which opens up scope for accounting maneuvers. For this reason, EBITDA is not a good indicator to know the monetary cash volume. However, it is useful for measuring the cash generation potential of operating assets.

How to calculate EBITDA?

A company’s EBITDA can be calculated based on information that is available in the Income Statement (Statement of Income for the Year).

To calculate EBITDA, it is necessary to find the company’s net operating profit, which can be obtained by the following formula:

Net revenue – cost of goods – operating expenses – net financial expenses = net operating profit

Operating expenses include both selling expenses for the product or service and general and administrative expenses.

After calculating the net operating profit, it is necessary to add the depreciation and amortization values, which were embedded in the calculation of the cost and operating expenses. The formula for calculating EBITDA can be represented as follows:

Net operating income + Depreciation + Amortization = EBITDA

EBITDA margin

The EBITDA margin is an indicator calculated by dividing EBITDA by net revenue. The result of this formula is a percentage value, which allows to know the percentage of profitability of the company’s operation before the remuneration of the capital of third parties, taxes and the recovery of the invested resources.

The higher the EBITDA margin, the better the company’s performance in this indicator.

EV / EBITDA

The EV / EBITDA ratio represents the relationship between the company’s value (in English, Enterprise Value or EV) and EBITDA. Sometimes, the indicator is also written as FV / EBITDA – in this case, FV is the acronym for Firm Value.

EV / EBITDA is used to measure the cash return rate of an investment. It allows comparing the valuation levels of companies, preferably from the same sector.

Adjusted EBITDA

In 2012, the CVM (Comissão de Valores Mobiliários) standardized the calculation of EBITDA, aiming at making this indicator more transparent and preventing abuses by companies.

Since then, companies that want to make adjustments to their EBITDA, including or deducting items, must use the nomenclature “Adjusted EBITDA”. In doing so, the company needs to describe the nature of the adjustment and justify it.

As they do not use the same methodology, care must be taken when comparing the adjusted EBITDA of different companies.

Difference between EBIT and EBITDA

EBIT and EBITDA are two similar concepts. The difference between them refers only to depreciation and amortization.

While EBITDA does not consider these two factors in its calculation, EBIT only deducts interest and taxes from profit, keeping the accounting effects of depreciation and amortization in the account.