EBIT, EBITDA and what gets left out

EBIT and EBITDA start from net income

Morrow's company reports a year: revenue $500, cost of sales $200 and other operating costs $120, both stated before depreciation, plus depreciation and amortization of $40. Three people look at the same page and quote three different "earnings": 140, 155 and 195. All three are doing correct arithmetic on different definitions.

EBIT is earnings before interest and taxes. EBITDA is EBIT with depreciation and amortization added back. The word "earnings" is the trap. In the SEC's discussion of these measures, earnings means GAAP net income, and the bridge is built upward from there. Both are non-GAAP measures in the SEC context, and any "adjusted" version that removes more items needs its own distinct label.

The full bridge

Operating income is 500 − 200 − 120 − 40 = $140. Add $15 of nonoperating income, subtract $10 of interest, and pretax income is 140 + 15 − 10 = $145. Tax at an assumed 25% is 145 × 25% = $36.25, so net income is 145 − 36.25 = $108.75.

Now climb back up. EBIT is 108.75 + 36.25 + 10 = $155. EBITDA is 155 + 40 = $195. EBIT is 155, not 140, because the $15 of nonoperating income never left. Adding back interest and tax restores exactly those two lines and nothing else. Operating income is a GAAP subtotal; EBIT and EBITDA are analyst constructions, and they only coincide in a business with no nonoperating items. Equality in one case is not a definition, so reconcile the actual presentation every time.

Interest income is the usual snag. If $3 of that nonoperating income is interest income, one analyst adds back only the $10 of interest expense and reports EBIT of 155; another adds back net interest of 10 − 3 = 7 and reports 152. Two honest analysts can differ by the interest income on the same page, so write the definition down.