If you’re a newer small business or a business that’s been around for quite a while, you know there are plenty of terms and lingo used daily once you’re an owner. Some of which you probably never heard of until recently. We at First Union Lending want to act as a resource as you maneuver through this incredible entrepreneurship journey. This week’s Business Term Breakdowns are EBIT & EBITDA…
What is EBIT?
EBIT stands for Earning Before Interest and Taxes. It is a huge indicator of a company’s profitability. Ignoring interest and taxes, EBIT focuses solely on a company’s ability to generate earnings from operations, ignoring variables such as the tax burden and capital structure. There are a few formulas used to calculate EBIT:
EBIT = Revenue – Cost of Goods – Operating Expenses
OR
EBIT = Net Income + Interest + Taxes
EBIT measures a company’s profit from its operations, making it synonymous with operating profit.
Why is it Important?
The EBIT helps monitor the profit trendline of a business. It provides an overview of how profitable a business has been over a long period. Therefore, it assesses to determine the viability of investing in a company. Learning your EBIT is critical if you’re considering pitching your business to investors.
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation and Amortization are calculated by removing Depreciation and Amortization from the EBIT value. To calculate EBITDA, take the net income value and add interest, taxes, depreciation, and amortization. Adding back depreciation and amortization can alter the company’s profitability, especially those with significant fixed assets. There are two formulas used to calculate EBITDA:
EBITDA = Operating Income + Depreciation & Amortization
OR
EBITDA = Net Income + Depreciation & Amortization + Net Interest Expense + Income Taxes
Why is it Important?
EBITDA is used to compare the profitability of companies by eliminating the effects of financing and accounting decisions. It is considered a capital structure neutral and will not impact the company how it funds its business.
Now That You Know – What Will You Do With This Information?
You can use this to understand where your business stands and how it can be improved with the help of investors or by acquiring business funding. At First Union Lending, we can help you acquire the funding you need with affordable payment options – whether for a short-term loan, line of credit, or debt consolidation. We have the resources available to work with you.