Formula
EBIT (Earnings Before Interest & Taxes) = Net Income + Interest + Taxes EBITDA = EBIT + Depreciation + Amortization
The Short Version
EBIT and EBITDA strip out certain costs to make it easier to compare the core operating performance of companies with different debt levels, tax rates, or asset bases. They are not official GAAP measures, but they are extremely widely used by analysts.
Explain It Like I'm 10
Imagine comparing two kids' lemonade stands to see which one runs better, but one kid had to borrow money from her parents (paying 'interest') and the other didn't. To compare them fairly on JUST how good their lemonade business is, you'd temporarily ignore the interest payment and any 'taxes' owed. That's EBIT — profit before interest and taxes get subtracted, so you can compare businesses fairly regardless of how they're financed.
Step-by-Step Example
- 1 Net Income: $40,000,000.
- 2 Add back interest expense: +$10,000,000.
- 3 Add back taxes: +$15,000,000.
- 4 EBIT = $40,000,000 + $10,000,000 + $15,000,000 = $65,000,000.
- 5 Add back depreciation & amortization: +$20,000,000.
- 6 EBITDA = $65,000,000 + $20,000,000 = $85,000,000.
- 7 This EBITDA figure strips out financing choices, tax situations, and non-cash equipment wear-and-tear, making it easier to compare two very differently-financed companies' core operations side by side.
Quick Recap
- ✓ EBITDA is often used as a rough proxy for operating cash generation, though it ignores capital expenditures.
- ✓ Because it excludes real costs (debt interest, taxes, and wear-and-tear on assets), EBITDA can make a heavily indebted or capital-intensive company look healthier than it is — always pair it with debt and cash flow figures.