Definition Of EBIT And EBITDA
EBIT or its abbreviation, Earnings before Interest and Taxes. EBIT defined as income before interest and taxes. In fact, EBIT is one indicator of the profitability (ability to earn profit) of a company. Many companies use this method to calculate the amount of income that has previously been reduced by the amount of expenses (not including interest and taxes).
Meanwhile, EBITDA is a measure of the financial mechanism of a company, which acts as a choice of other metrics, such as revenue and/or net income. The abbreviation EBITDA itself has the following meanings: Earnings (income), Before (before), Interest (interest), Taxes (taxes), Depreciation (depreciation), and Amortization (amortization).
EBITDA is how much people determine the value of a business because it focuses on the financial results of operating decisions. Earnings before Interest, Taxes, Depreciation and Amortization is done by eliminating the impact that arises from non-operational decisions decided by company management, such as tax rates, interest costs, or important abstract (intangible) assets.
This calculation method leaves out numbers that tend to reflect the profitability of operating a business. Figures that can effectively be compared between companies by buyers, investors and owners. Therefore, EBITDA is used more than any other metric to decide which organization is more attractive.
The difference between EBIT and EBITDA is the number of steps applied. Earnings before Interest and Taxes only offers the value of income excluding the effects of interest and taxes. Meanwhile, Earnings before Interest, Taxes, Depreciation and Amortization identifies and eliminates costs related to depreciation (depreciation in value, such as currency values) and amortization (gradual depreciation of debt and absorption of intangible assets).
The two calculation methods are actually useful as a reference when describing the value of the company, providing a clear description of business expenses, as well as the relative impact on the value of these business expenses.
EBIT Calculation Formula
The formula for calculating EBIT is to subtract COGS (cost of goods sold) and operating costs from the total revenue. There are two ways to calculate EBIT, namely:
Formula 1: total revenue – COGS (cost of goods sold) – operating costs
Formula 2: net income + interest + tax
Example Of EBIT Calculation Question
A company engaged in the garment industry makes an income report with the following data:
- Sales proceeds: $ 4,000,000,000
- COGS (Cost of goods sold): $ 1.600.000.000
- Operational cost: $ 200,000,000
- Gross profit: $ 600,000,000
- Income tax: $ 30,000,000
- Interest fee: $ 150,000,000
- Net profit: $ . 200,000,000
The following is the calculation using the EBIT method:
Net profit + interest + tax
$ 200.000.000 + $ 150.000.000 + $ 30.000.000
EBIT value = $ 380,000,000
So, the value of $ 380,000,000 can also be interpreted as a profit / profit of $ 380,000,000. The calculated money can be used to pay taxes, bank interest, accounts payable, and investor dividends.
EBITDA Calculation Formula
EBITDA calculation for a company can be done using at least one of the following two formulas because they both give the same result.
Net profit + tax + interest + depreciation + amortization
Operating income + amortization + depreciation
Example Of EBITDA Calculation Questions
The revenue of a textile company is $1,000,000 with operating expenses of $200,000 and $50,000 as depreciation and amortization expenses.
Operating income excluding taxes and interest (or EBIT ) is $750,000. If we then subtract the interest expense of $50,000, we’ll get a pre-tax profit of $700,000. Subtracting $100,000 in taxes, the company’s net income is $600,000.
To get the EBITDA value, take operating income, then add back the depreciation and amortization values:
EBITDA = $750.000 + $50.000
Thus, the EBITDA value for the textile company is $800,000.
Both EBIT and EBITDA contain similarities in measuring the financial mechanisms of a company. In fact, both methods are used to derive results as well as estimate metric analysis.
The difference between the two lies in the results of the company’s performance. The EBIT description can explain how well a company is operating. Meanwhile, EBITDA shows the strength of a company in expanding or spending capital. Both methods can also help you invest in your company for a better future.