EBIT and EBITDA: difference
If you're looking for a deeper understanding of your company's actual profitability, the term EBIT demands your attention. Often confused with EBITDA, these two acronyms have distinct differences. When analyzing a company's (potential) profitability, it is important to examine different methods. For new business owners, understanding these aspects is valuable as it helps assess whether their future company can thrive among the competition. To find out a specific analysis of each of the abbreviations, why EBITDA is used more often than EBIT, and which indicator you need, read the blog from Just2Trade - a leading international investment company, providing its clients with direct access to the major world currency and stock markets.
EBIT and EBITDA are abbreviations. EBIT means earnings before interest and taxes, and EBITDA means earnings before interest, taxes, depreciation and amortization. Although these terms are sometimes used interchangeably, they differ in meaning. Both methods essentially show how much money you make before subtracting necessary expenses, providing a clear picture of your income as an entrepreneur. Earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA) are similar methods of calculating the profitability of a business. They both start with net income and add interest and taxes. EBITDA also includes depreciation and amortization. EBITDA is often preferred when comparing companies with significant fixed assets. Depreciation is the wear and tear that occurs from the use of fixed assets, such as equipment or machinery needed for your business. As a machine ages, it loses some of its original value and may eventually stop working properly. On the other hand, depreciation occurs due to external factors such as the introduction of a better machine into the market, which immediately reduces the value of the existing machine. Companies with extensive fixed assets tend to have higher depreciation, resulting in a lower EBIT percentage compared to companies with fewer fixed assets. This is because EBIT takes into account property, plant and equipment, as opposed to calculating EBITDA.
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