EBIT vs. EBITDA: Key differences and how to calculate

EBIT and EBITDA are closely related profitability metrics, but they treat depreciation and amortization differently. EBIT measures operating profit after accounting for operating expenses, including depreciation and amortization, while EBITDA adds those non-cash expenses back to show earnings before asset costs.

Understanding the difference between EBIT and EBITDA helps you analyze profitability, compare companies across industries, and build cleaner financial models.

What is EBIT?

EBIT stands for earnings before interest and taxes. It measures your company’s operating profit before financing costs and income taxes, isolating how your core business performs regardless of capital structure or tax strategy.

EBIT represents operating profit after accounting for operating expenses. Those expenses include:

• Cost of goods sold (COGS)
• Selling and administrative costs
• Depreciation and amortization tied to operations

Because these costs reflect real economic wear and tear, EBIT captures the true cost of running the business. That makes it useful for evaluating operational efficiency.

EBIT formula

The basic formula for EBIT is:

EBIT = Revenue – Operating expenses (including Depreciation and Amortization)

You’ll often see EBIT labeled as operating income on an income statement, though definitions can vary slightly by company.

EBIT is derived from GAAP financial statements. That consistency makes it useful for financial reporting and comparability analysis, especially when you want a more conservative view of profitability.

How to calculate EBIT

You can calculate EBIT in more than one way, depending on where you start in the income statement. Both methods arrive at the same result when the underlying inputs are consistent.

Step 1: Calculate revenue

Start with total revenue for the period, which reflects all sales before expenses. From there, subtract cost of goods sold to arrive at gross profit. This shows how much you earn after direct production costs and sets the foundation for evaluating operating efficiency.

Step 2: Subtract operating expenses

Next, subtract operating expenses such as sales and marketing, general and administrative costs, and research and development. These are the costs required to run the business day to day.

This step includes depreciation and amortization tied to operating assets.

Step 3: Arrive at EBIT

After subtracting all operating expenses, the remaining figure is EBIT. This number reflects profit generated by operations before financing and taxes. It’s often labeled as operating income on the income statement.

Assume a company has $1,000,000 in revenue. Cost of goods sold is $400,000, operating expenses are $350,000, and depreciation and amortization are $50,000.

EBIT = $1,000,000 – $400,000 – $350,000 – $50,000 = $200,000

EBIT equals $200,000. That figure represents operating profit before interest and taxes.

Alternate method

You can also calculate EBIT starting from net income. Add back interest expense and income tax expense to net income. This approach is useful when you’re working with summarized financial statements rather than a full income statement.

What is EBITDA?

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a non-GAAP metric that measures operating performance by adding depreciation and amortization back to EBIT.

By removing non-cash accounting charges, EBITDA focuses on earnings generated by operations before financing and taxes. Supporters argue this makes it easier to compare companies with different asset bases.

EBITDA is common in valuation and credit analysis. However, it does not represent actual cash flow.

EBITDA formula

The standard formula for EBITDA builds on EBIT:

EBITDA = EBIT + Depreciation + Amortization

You may also see EBITDA calculated by adding interest, taxes, depreciation, and amortization back to net income.

Depreciation and amortization reflect real economic costs over time. Ignoring them can make asset-heavy businesses appear more profitable than they are, which is why EBITDA should be used carefully.

How to calculate EBITDA

EBITDA calculations usually start with EBIT, but you can approach it step by step to avoid double counting or omissions.

Step 1: Calculate EBIT

Begin with EBIT using the steps above. This ensures you’ve already accounted for all operating expenses, including depreciation and amortization, and creates a clean baseline.

Step 2: Add back depreciation

Add back depreciation expenses related to fixed assets like equipment and buildings. Depreciation is a non-cash charge, but it reflects tangible asset usage over time. Adding it back increases reported earnings.

Step 3: Add back amortization

Finally, add back amortization related to intangible assets such as software or acquired customer lists. Like depreciation, amortization is non-cash. After this step, you arrive at EBITDA.

Using the earlier example, EBIT was $200,000. Assume depreciation is $40,000 and amortization is $10,000.

EBITDA = $200,000 + $40,000 + $10,000 = $250,000

EBITDA equals $250,000. That figure reflects earnings before non-cash charges.

EBIT and EBITDA: Key differences

The primary difference between EBIT and EBITDA is how each metric treats depreciation and amortization. EBIT includes these expenses, while EBITDA adds them back, which can materially change how profitability looks for asset-heavy businesses.

EBIT is derived from GAAP financial statements, while EBITDA is a non-GAAP metric defined by management. Each highlights a different aspect of performance, so reviewing both gives you a more complete view of operating results.

Both metrics remove interest and income taxes, which makes them useful for comparing companies with different capital structures. In most cases, EBITDA is higher than EBIT because it adds depreciation and amortization back to earnings.

Impact of capital structure

Capital intensity influences how useful each metric is in practice. Asset-heavy businesses such as manufacturers incur significant depreciation, which makes EBIT a more realistic measure of economic performance. Asset-light businesses often rely more heavily on EBITDA because depreciation plays a smaller role in their cost structure.

EBITDA can be misleading for capital-intensive companies. If a business must continually reinvest in equipment or infrastructure to maintain operations, excluding depreciation understates long-term costs. That’s why lenders and long-term investors typically look beyond EBITDA when evaluating risk.

Cash flow considerations

While EBITDA is closer to cash flow than EBIT, it is not cash flow. EBITDA does not account for:

• Changes in working capital
• Capital expenditures
• Cash taxes
• Cash interest payments

A company can report strong EBITDA and still burn cash. Inventory growth, slower customer payments, or large equipment purchases can reduce liquidity even when EBITDA appears healthy. For that reason, you should review EBITDA alongside cash flow metrics and balance sheet trends.

When to use EBIT vs. EBITDA

The right metric depends on what you’re analyzing. EBIT and EBITDA answer different questions, so your choice should reflect the company’s capital intensity, industry norms, and analytical goal.

EBIT use cases

You should consider EBIT in these scenarios:

• Comparing companies with different depreciation policies: EBIT neutralizes financing effects while keeping asset costs in view, which supports more conservative comparisons
• Evaluating operational efficiency: Because it includes operating expenses, EBIT highlights cost control and margin trends
• Assessing true operating performance: EBIT reflects the cost of running the business as it exists and avoids overstating profitability by ignoring asset wear

EBITDA use cases

EBITDA is often more useful in these situations:

• Valuation multiples: EBITDA is commonly used in enterprise value (EV)/EBITDA multiples in deal analysis
• Leveraged buyout analysis: Lenders and sponsors focus on EBITDA to assess debt capacity and leverage tolerance
• Comparing different capital structures: EBITDA removes the effects of interest payments, making peer comparisons easier
• Debt covenant calculations: Many lending agreements set leverage ratios based on EBITDA, making consistency and adjustments critical

EBIT vs. EBITDA in valuation and financial modeling

EBIT and EBITDA are widely used in valuation because they remove the effects of capital structure. Metrics such as EV/EBIT and EV/EBITDA allow you to compare companies without distortions from debt levels or tax strategies.

EV/EBITDA is common in mergers and acquisitions because it smooths differences in accounting and financing. EV/EBIT is more conservative and often preferred for capital-intensive businesses where depreciation reflects a real economic cost. In practice, reviewing both metrics helps you balance earnings power against long-term asset economics.

Common valuation multiples

EV/EBITDA ranges vary by industry and growth profile:

• Software and technology: Often 10–20x+ due to higher margins and growth expectations
• Manufacturing: Often 5–10x, reflecting capital intensity and cyclical risk
• Utilities: Often 6–12x, shaped by regulated returns and stable cash flows

Multiples vary widely based on growth, leverage, and market conditions, so ranges should be treated as directional benchmarks rather than fixed rules.

Price-to-earnings (P/E) ratios are most useful when net income is stable. EV/EBIT is often a better choice when comparing companies with different leverage profiles.

Enterprise value formula

Enterprise value represents the total value of a company’s operations, independent of capital structure.

Enterprise value (EV) = Equity value + Net debt

Net debt is typically calculated as total debt – cash and cash equivalents. Using enterprise value instead of market capitalization allows you to compare companies with different debt levels more accurately.

EBIT margin vs. EBITDA margin

Margins help you compare profitability relative to revenue.

EBIT margin = EBIT / Revenue

EBITDA margin = EBITDA / Revenue

EBIT margin reflects operating profitability after accounting for asset wear and tear. EBITDA margin removes non-cash expenses, which can make asset-heavy companies appear more profitable. Reviewing both margins helps you determine whether reported earnings are supported by sustainable asset economics.

Common misconceptions and limitations

One common misconception is that EBITDA represents cash flow. While EBITDA removes non-cash expenses such as depreciation and amortization, it ignores capital expenditures and changes in working capital, both of which materially affect liquidity.

Another limitation is that EBITDA can mask poor capital allocation. By adding back depreciation, EBITDA ignores the ongoing cost of maintaining or replacing assets. Companies with aging equipment may appear profitable even as reinvestment needs grow.

EBIT also has limitations, particularly when comparing companies across industries or asset bases. Differences in depreciation methods, asset age, and capitalization policies can affect EBIT even when underlying operating performance is similar.

Watch for these red flags:

• Large or growing EBITDA adjustments that exclude recurring costs
• Strong EBITDA growth paired with negative operating cash flow
• Heavy capital expenditures not reflected in profitability metrics
• Frequent changes to non-GAAP definitions from one period to the next
• High leverage supported primarily by EBITDA-based covenants

Some companies report adjusted EBITDA, which excludes additional expenses such as restructuring costs, legal settlements, or stock-based compensation. While adjustments can help isolate ongoing operations, they are subjective and can overstate profitability if recurring costs are excluded. Lenders and investors typically scrutinize EBITDA adjustments closely.

When EBITDA can be misleading

EBITDA is most misleading when reinvestment needs are high. Asset-heavy businesses may report strong EBITDA while requiring constant capital spending to sustain operations.

Two companies may report identical EBITDA, but if one must reinvest a large portion of that EBITDA into capital expenditures just to maintain operations, its true economic profit is far lower. EBITDA alone will not reveal that reinvestment burden.

EBITDA also ignores working capital dynamics. Inventory buildup or slower collections can strain cash even when EBITDA trends upward. For that reason, you should evaluate EBITDA alongside cash flow and balance sheet metrics.

EBIT vs. operating income vs. net income

EBIT and operating income are closely related but not always identical. Operating income is a GAAP-defined line item on the income statement, while EBIT is a broader analytical concept often used to isolate operating performance before financing and taxes.

In many companies, EBIT and operating income are the same. In others, management may include or exclude certain non-operating items, which can create small differences.

Net income goes further by incorporating interest and tax effects. It reflects the final profit available to shareholders after all expenses. While net income is central to equity valuation, it’s less useful for comparing companies with different capital structures.

Conceptually, EBIT sits between operating income and net income. It isolates operating performance while removing financing and tax distortions.

Complete income statement flow

The income statement shows how revenue turns into profit:

1. Subtract cost of goods sold from revenue to calculate gross profit
2. Subtract operating expenses such as sales and marketing, general and administrative costs, and research and development to arrive at operating income, often synonymous with EBIT
3. Subtract interest expense and income taxes from EBIT
4. The final result is net income, which represents profit available to shareholders

Practical example: Calculating EBIT and EBITDA

A simplified example shows how EBIT and EBITDA differ in practice and what each metric reveals about profitability.

Assume a company reports $2,000,000 in revenue. Cost of goods sold totals $900,000. Operating expenses are $700,000, including $100,000 in depreciation and amortization. Interest expense is $50,000, and income taxes are $70,000.

First, calculate EBIT:

EBIT = $2,000,000 – $900,000 – $700,000 = $400,000

Next, calculate EBITDA by adding back depreciation and amortization:

EBITDA = $400,000 + $100,000 = $500,000

Finally, calculate net income:

Net income = $400,000 – $50,000 – $70,000 = $280,000

Each metric highlights something different. EBIT reflects operating profitability after asset costs. EBITDA shows earnings before non-cash charges. Net income captures the full impact of financing and taxes. Reviewing all three gives you a more complete picture of performance.

Track profitability metrics with Ramp

EBIT and EBITDA both depend on clean, accurately categorized financial data. When transactions are miscoded or receipts are missing, your profitability metrics become unreliable.

Ramp's accounting automation software helps ensure every transaction is coded accurately and synced in real time, so you can trust the numbers behind your valuation models. Every expense is matched with receipts and approvals automatically, giving you the documentation needed to support EBIT and EBITDA calculations during audits or investor due diligence.

Here’s how Ramp supports accurate profitability tracking:

• AI-powered coding: Ramp codes transactions in real time across all required fields, so operating expenses are categorized consistently for EBIT calculations
• Automated receipt matching: Every transaction is paired with receipts and approvals behind the scenes, creating a complete documentation trail for valuation analysis
• Real-time sync: Ramp syncs routine, in-policy spend to your ERP automatically, so profitability metrics reflect current data without manual entry delays
• Accrual automation: Ramp posts and reverses accruals automatically to ensure expenses land in the right period, keeping EBIT and EBITDA calculations period-accurate

Try a demo to see how Ramp helps finance teams track profitability metrics with confidence.