Many companies evaluate their corporate results on the basis of the so-called EBIT or EBITDA margin. But what exactly is this key figure and what does it mean for the performance of a company?
EBIT and EBITDA as key figures
EBIT and EBITDA are two important key figures that companies use to measure their earning power. EBIT stands for “earnings before interest and taxes” and is a measure of a company’s operating profit. EBITDA stands for “earnings before interest, taxes, depreciation and amortization” and is a measure of a company’s cash flow.
Difference between EBIT and EBITDA
The difference between EBIT and EBITDA lies in the additional costs that are taken into account when calculating EBITDA. Depreciation and amortization is the amortization of property, plant and equipment and intangible assets. These costs are not normally considered part of operating profit as they are not directly related to the operation of the business. EBITDA is therefore a better indicator of a company’s cash flow than EBIT. Therefore, it is often the preferred measure when it comes to valuing companies.
EBIT/EBITDA are important financial ratios that measure the profitability of a company. However, there are also some disadvantages to be aware of. For one, distortions can occur if the company has high debt. For another, Ebit/Ebitda is only one of many ratios that should be used when evaluating a company.