EBIT vs. EBITDA: Which Tells the Better Story?

EBIT vs. EBITDA: Which Tells the Better Story?

EBIT and EBITDA are both ways to measure business performance — specifically, operating performance. They both sit above the net profit line, and they each filter out different things to give their picture of how a company is doing. But they’re not interchangeable. Here’s what to know.‍

EBIT: Earnings Before Interest and Taxes

EBIT is a measure of a company’s core operating profit. It shows how much money the business makes from operations, before the cost of financing (interest) and before the government takes its cut (taxes).

EBIT = Revenue – Operating Expenses (including Depreciation &Amortization)
or:
EBIT = Net Income + Interest + Taxes

Use EBIT when you want to:

• Compare companies with different tax rates or debt structures
• Focus on operational performance without being distracted by financing decisions

EBIT shows operating profit after accounting for asset wear-and-tear. If you're comparing companies in different industries or geographies, it's a useful way to level the playing field—at least partially.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization

EBITDA goes one step further. It adds back non-cash expenses: depreciation (for physical assets) and amortization (for intangible assets). These are accounting estimates, not actual cash out the door.

EBIT = Revenue – COGS - SG&A - R&D Expenses (i.e. Operating Expenses but not including Depreciation &Amortization)or:
EBITDA = EBIT + Depreciation + Amortization  =  Net Income + Interest + Taxes+ Depreciation + Amortization

Use EBITDA when you want to:

• Focus on cash-generating ability, especially in asset-heavy industries
• Strip out accounting choices that can distort comparisons
• Estimate how much cash might be available to pay down debt or reinvest

That means EBITDA can be useful when you’re trying to understand how much cash the business is actually generating from operations.

A Simple Example

Let’s say a company reports the following for the year:

• Revenue: $1,000,000
• Direct Costs & Operating Expenses (excluding depreciation): $600,000
• Depreciation & Amortization: $50,000
• Interest Expense: $30,000
• Taxes: $70,000

We can calculate:

EBITDA = Revenue – Costs & Expenses = 1,00,000 - 600,000 = $400,000

EBIT = EBITDA – D&A = 600,000 – 50,000 = $350,000

EBITDA shows how much the business earns after covering its regular operating costs and expenses.EBIT shows what’s left after including wear and tear (because assets don’t last forever).

Industry Differences — and Accounting Placement

Here’s something else to keep in mind: the role of depreciation doesn’t change across industries—it’s still the gradual expense of physical assets. But how it shows up on the income statement can vary.

In capital-heavy industries—like airlines, telecoms, or manufacturing—depreciation is typically included in operating costs  as COGS or OpEx. That means the operating income line (EBIT) already reflects those expenses. However, depreciation can significantly reduce reported profits, even when the business is generating strong cash flow. A company might add depreciation back in to show EBITDA, which offers a clearer picture of cash-generating ability.

In tech and service businesses, where there’s less physical infrastructure, depreciation is typically smaller—and often recorded below the operating line. In those cases, EBITDA becomes the more relevant “operating income” metric, because it leaves out even modest depreciation costs.

In either case, stripping out depreciation can help you focus on cash flow and make more apples-to-apples comparisons—especially when comparing companies across different industries.

Watch Out for EBITDA Trickery

EBITDA can be helpful, but also misleading if used carelessly.

Adding back depreciation and amortization ignores the reality that equipment wears out and software licenses expire. If a business needs to reinvest heavily just to keep operating, EBITDA might overstate its financial health.

In some cases, companies highlight EBITDA to distract from poor net income. That’s not automatically a red flag — but it’s worth looking twice.

Are EBIT and EBITDA GAAP-Compliant?

EBIT and EBITDA are non-GAAP metrics. That means they’re not required by accounting standards—and companies aren’t required to report them. But many do, especially in earnings calls and investor presentations, because they help clarify a company’s operating or cash-generating performance.

If a company reports EBIT or EBITDA, it must:

• Clearly label them as non-GAAP
• Reconcile them to official GAAP metrics like Net Income
• Explain how they were calculated

Used properly, these measures can provide valuable insight. But they aren’t substitutes for audited financials—and they’re only as reliable as the assumptions behind them.

So Which One Should You Use?

It depends on the question you’re asking.

Bottom Line

EBIT and EBITDA both filter out things that distort financial performance. But they’re filters — not final answers. The value lies in asking the right question, knowing what each metric includes, and not mistaking either one for cold hard cash.

Want to test your understanding?
Try our EBITDA Storytelling Challenge to compare two companies with identical EBITDA—but very different realities.

Or explore the full simulation that inspired this blog.
Learn more about Income|Outcome workshops →

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