EBIT stands for “earnings before interest and taxes” and is often referred to as a company’s operating result.
Ebitda also adjusts the result for depreciation.
Both key figures help to compare the earning power and efficiency of companies. However, investors should consider them in conjunction with other metrics.
There are a variety of metrics that listed companies publish in their reports. This also includes EBIT and Ebitda. We explain to you what these abbreviations mean and what investors can derive from them.
Ebit Definition
EBIT is one of the most important earnings figures in an annual report. EBIT stands for “Earnings Before Interest and Taxes”. EBIT is also often referred to as a company’s operating result or operating profit.
There are several ways to calculate the key figure. One of them works with the help of the annual surplus, or net profit. Subtracting from this the income taxes, extraordinary income and expenses as well Interest charges down, you get the EBIT.
What does the EBIT say?
The EBIT should show how profitable the core business of a company and thus allow conclusions to be drawn about economic success. For this purpose, variable influences should be removed from the representation. So the profit is adjusted.
The ratio makes it easier to compare with other companies in the same industry by neutralizing the influence of interest payments and taxes. Because the amount of taxes and interest on financing differ from country to country.
Ebitda definition
Ebitda also aims to show the efficiency of companies and make them comparable. Ebitda stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Means: Earnings before interest, taxes and depreciation of tangible and intangible assets. In the case of Ebitda, the depreciation of companies is also excluded.
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What does the Ebitda say?
Depreciation is an accounting process in which the depreciation of assets is offset. This becomes necessary, for example, when a company purchases a new machine.
Depreciation is usually necessary to generate growth. That is why they can have a major impact on results, especially in capital-intensive sectors and in younger companies. The Ebitda should therefore exclude additional distorting factors from the result.
Criticism of the key figures EBIT and Ebitda
Ebit and Ebitda can help to compare the earning power of companies. However, there is criticism of the use of the key figures. Because interest payments, taxes and depreciation, according to critics, have an influence on the actual financial situation of a company.
In addition, although Ebit and Ebitda are formally defined quantities, there is no generally accepted definition of content. It can therefore vary from company to company certain factors are part of the indicators. Ebitda in particular is criticized for being easy to manipulate because it ignores many factors.
In addition, companies often state an “adjusted” or “normalized” EBIT or Ebitda in their annual reports. However, there are no specific prescribed rules for cleanup. As a result, EBIT and Ebitda can be affected by what each company says is normal business activity and what is one-off or exceptional.
So when companies talk about operating profits, it doesn’t necessarily mean that they are actually making profits. For investor It is therefore important to always look at the key figures in context. Ebit and Ebitda, especially in combination with other key figures, help you to get a comprehensive picture of a company’s financial situation.
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Disclaimer: Stocks and other investments are always associated with risk. A total loss of the invested capital cannot be ruled out either. The published articles, data and forecasts are not an invitation to buy or sell securities or rights. They also do not replace professional advice.