EBIT

EBIT stands for earnings before interest and taxes. It shows operating earning power before financing structure and tax rate distort the picture, which makes companies with different debt levels comparable. Unlike EBITDA it is already net of depreciation and amortisation, so it reflects the consumption of fixed assets and sits well below EBITDA in capital-intensive business models. It is derived either from the top, starting with revenue less materials, personnel and other operating expenses as well as depreciation, or from the bottom, starting with net income and adding back tax and net interest.

In valuation it is the basis of the EV/EBIT multiple and the starting point for NOPAT in a discounted cash flow model, calculated as EBIT multiplied by one minus the tax rate. Because depreciation is included, EBIT responds to accounting choices such as useful lives, capitalisation options and lease treatment, which complicates comparison between companies and is precisely why EBITDA is popular. Conversely EBIT has the advantage of including the accounting consumption of assets, making it an important complement to EBITDA for asset-heavy businesses.

The EBIT definition used should be transparent, since companies may classify individual earnings components differently. In particular it should be checked whether income from participations, currency effects or one-off gains are included. Comparing depreciation with capital expenditure is informative, because depreciation persistently above investment may point to an ageing asset base whose replacement falls to the buyer. Amortisation arising from an earlier purchase price allocation also deserves attention, since it may affect comparability with organically grown companies and may warrant a separate adjustment.