Recommendations on Defining and Using of EBIT&EBITDA

Abstract

There are multiple metrics available to analyze the profitability of a business’ core operations. EBIT and EBITDA are most commonly used among those. The key difference between EBIT and EBITDA is that EBIT deducts the cost of depreciation and amortization (D&A) from income, whereas EBITDA does not. They can traditionally be computed on the basis of operating income as well as net income. And they can also be adjusted or modified for the purpose. Differences in their computations can lead to varied results though they have similarities. EBIT allows us to better measure the profit under different capital structures and tax rates but EBITDA also excludes diversities in asset structures by D&A. But it should be remembered that these excluded espenses, such as interests and D&As, are actual and could be significant. Given that there is not a common ground on computing and using ways of these metrics, the purpose of this study is to guide the computation and use of these metrics relevantly in a rationale framework. In addition, the misleading perception that EBITDA and D&A alone represent cash flow has been tried to get breached. In the study based on IFRSs and taxonomies, reference computations have been made for practitioners and researchers.