EBIT stands for Earnings Before Interest and Taxes.

Whilst you may hear many people talking about EBITDA, the use of EBIT is somewhat neglected, whereas if you think about it, the difference between EBIT and EBITDA is just depreciation and amortization.

Why would someone however prefer EBIT to EBITDA? Why is it so that one is preferred over another?  

What’s the difference between those two? The difference between the two mainly arises from the involvement of investments into assessing company’s performance. EBITDA eliminates depreciation related to assets, whereas financial advisors see depreciation as measure to assess the need for an investment or capital expenditure required to keep the business running. EBIT on the other hand includes in itself capital expenditure as well, only adding back to the net profit the interest expense and taxes. It effectively reflects the company’s results including the required capital investments made for the period.

How so you may ask?

Think about what depreciation reflects. It’s to show usage of the asset over a period of time and to reflect on the acquisition cost depreciated over the period. Presuming the useful life equals to the actual usage, the same amount of investment is required for the same period again in the future. So it is safe to presume the depreciation in EBIT is a fair presentation of needed capital in future.