How each one is built
Starting from net income, EBIT adds back interest expense and income tax. EBITDA goes one step further and also adds back depreciation and amortization, the expenses that spread the cost of equipment, buildings and intangible assets over the years they are used. The calculator above builds both from the same figures, so the only difference between the results is depreciation plus amortization.
An example
A business reports net income of $50,000, interest expense of $10,000 and income tax of $15,000. Its EBIT is 50,000 + 10,000 + 15,000 = $75,000. With depreciation of $20,000 and amortization of $5,000, its EBITDA is 75,000 + 20,000 + 5,000 = $100,000.
Why the difference matters
- EBIT still carries the cost of using long-lived assets, so it suits comparisons where those assets are a real cost of doing business. The interest coverage ratio uses EBIT for this reason.
- EBITDA leaves that cost out, which makes businesses with different asset bases and depreciation policies easier to compare. It is the earnings figure behind the EBITDA margin and EV/EBITDA.
- Neither is cash flow. Both ignore spending on new equipment and changes in working capital, and EBITDA also ignores the interest and tax the business must still pay.
- EBITDA is not defined by accounting standards. Companies that report it often make their own adjustments, so check how any figure you compare was built.
EBIT built up from net income can also differ from the operating income a company reports, when it has non-operating income or expenses such as investment gains. The EBITDA calculator lets you start from either figure.
Summary
| EBIT | EBITDA | |
|---|---|---|
| Built from net income | + interest + income tax | + interest + income tax + depreciation + amortization |
| Includes the cost of long-lived assets | Yes | No |
| Defined by accounting standards | No; often close to operating income | No; a non-GAAP measure |
| Used in | Interest coverage | EBITDA margin, EV/EBITDA, many lender tests |