M&A Glossary
EBIT: what it is and how it differs from EBITDA
EBIT is operating profit, the result from the core business before interest and income tax. Exactly one line separates it from EBITDA: depreciation and amortisation. EBIT is after it, EBITDA before.
The formula
EBIT is revenue less operating costs, including depreciation. From the bottom of the income statement: net profit plus income tax plus interest.
EBIT = EBITDA minus depreciation and amortisation. That is the whole difference between the two measures.
When to look at EBIT and when at EBITDA
EBIT tells you more when
- the company holds fixed assets that genuinely wear out
- machinery will need replacing within a few years
- you want the result after the cost of using up assets
EBITDA tells you more when
- comparing companies with different depreciation policies
- assets are leased or rented
- you want a proxy for operating cash
The role of EBIT in a transaction
In Polish mid-market transactions valuation usually rests on EBITDA, because it is easier to compare across companies. EBIT comes back into the conversation where depreciation reflects real wear. A buyer of a manufacturer with a fifteen-year-old machine park will calculate the replacement cost, and that number enters the negotiation whichever measure was used as the base.
A large gap between EBIT and EBITDA is a signal to look separately at replacement capex. A company with high EBITDA and low EBIT owes part of its result to assets that will have to be bought again.
Frequently asked
Questions about EBIT.
How do you calculate EBIT?
Net profit plus income tax plus interest. Or from the top: revenue less all operating costs, including depreciation and amortisation.
Is EBIT the same as operating profit?
In practice yes. EBIT stands for earnings before interest and taxes, which corresponds to operating profit in the income statement.
What does negative EBIT with positive EBITDA mean?
That depreciation consumes the entire operating result. The business generates cash day to day but does not cover the cost of using up its assets. For a buyer, that signals high replacement capex ahead.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge