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### EBIT vs. EBITDA

EBIT and EBITDA are two financial metrics often used when conducting financial analysis alongside other figures such as enterprise values. EBIT (or Operating Profit) stands for Earnings Before Interest and Tax, whilst EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. For more details on Depreciation and Amortisation, see this tutorial.

The method of calculating each is very similar, although EBITDA incorporates an extra two numbers. The methods are shown below using two examples.

As per the diagram, EBITDA follows the same method of calculation as EBIT, but then adds back depreciation and amortisation. In this instance, you therefore take the £6m of EBIT and add £0.5m and add another £0.5m to reach £7m as shown. In a real set of accounts, EBIT is easy to calculate since the 'Operating Profit' of a company can be found under the income statement. EBITDA can be slightly more complicated since it is not always provided within the headline numbers. Therefore you have to calculate it manually by taking the EBIT and looking for the amortisation and depreciation.

An Example: Marks & Spencer (LSE:MKS) Below is an example of performing the calculation for Marks & Spencer. Marks & Spencer does provide EBITDA numbers in its headline figures, but we can work backwards so that we can check our answer is relatively close to the headline figure. The set of results used are the 2014 half-year results released on November 5th 2014. We are told within the headline section that EBITDA is £578.8m as per the capture on the right. The first step is to look for the EBIT figure; remember that this is usually shown as Operating Profit, and you can simply search for that manually or through CTRL+F. As is the case, the operating profit or EBIT is shown under the Income Statement. In this instance, we are told that the underlying operating profit is £318.6m. This is the EBIT that we want to use when estimating the EBITDA.

The next step is to look for amortisation and depreciation. This is usually found under the cash flow statement of a set of results, but a CTRL + F for either of the two terms should locate it within the results. Take the blacked out operating profit to read £318.6m
From the above we can see that there is a point to overcome. We are given depreciation and amortisation, but we are also given write-offs, and we do not want to include this in the EBITDA figure. However, we are not told in the results what the write-offs total, so we have to use this 'all-in' figure and then compare it to the headline EBITDA of £578.8m that we were given earlier.

Therefore, £318.6m + £264.5m = £583.1m. In this instance £583.1m is close to £578.8m so the quantity of write-offs are small and do not skew the EBITDA figure too much. The difference between the two is less than 1% hence there is not a major issue in using this figure either, albeit there will be a slight discrepancy.

In any case, this example shows how you can calculate EBITDA from a company's financial statements and you can start using EBITDA in other financial metrics.