EBITDA vs EBIT: Differences, Examples, and When to Use Each One

EBITDA and EBIT are two financial indicators widely used to analyse a company’s profitability. They often appear together in financial reports, negotiations with lenders, company valuations, and sale and purchase agreements. However, their apparent similarity frequently creates confusion and, more importantly, can lead to significant contractual disputes.

Do they measure the same thing? Which one is better? When should you use one or the other?

In this article, we explain the differences between EBITDA and EBIT, what information each indicator provides, when it is more appropriate to use each one, and how to interpret them correctly, with a practical approach designed for SMEs and growing businesses.

Starting point: what do EBITDA and EBIT have in common?

Both EBITDA and EBIT are indicators that measure operating profitability, meaning they focus on the results generated by the company through its core business activities, before taking into account the impact of its financing structure (interest) and tax burden (taxes).

Both answer a key question: Is the business profitable on its own?

The difference lies in which expenses they include and which they exclude.

If you first need to review what EBITDA is and how it is calculated, you can consult our complete guide to EBITDA.

 

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What is EBITDA?

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) measures business performance before deducting interest, taxes, depreciation, and amortisation. In practice, it reflects the company’s ability to generate results through its core operations while isolating the effects of:

• Financial structure (interest).
• Taxation (taxes).
• Accounting expenses that do not involve an immediate cash outflow (depreciation and amortisation).

Precisely because of this more “operational” approach, EBITDA is commonly used to compare companies, analyse business efficiency, value companies, and assess financing capacity, especially in contexts involving growth, investment, or negotiations with banks and investors.

What is EBIT?

EBIT (Earnings Before Interest and Taxes), also known as operating profit, measures operating earnings after deducting depreciation and amortisation, but before interest and taxes.

Unlike EBITDA, EBIT:

• Does take into account asset wear and tear or the loss in value of productive assets (machinery, buildings, software, etc.).
• Still isolates the effects of financing structure and taxation.

This indicator has a clear accounting basis. Under the Spanish General Accounting Plan, EBIT usually corresponds to the operating profit item in the profit and loss account.

Key differences between EBITDA and EBIT

The fundamental difference between the two indicators lies in the treatment of depreciation and amortisation, which are accounting expenses but not cash outflows.

Indicator	Includes depreciation and amortisation?	What does it mainly measure?
EBITDA	❌ No	Potential to generate gross operating profit.
EBIT	✅ Yes	Operating profitability considering the cost of using assets.

Put simply:

• EBITDA shows the business’s potential.
• EBIT provides a view closer to economic reality.

Practical example: EBITDA vs EBIT

Imagine a company with the following annual figures:

• Revenue: €1,000,000
• Operating expenses (excluding depreciation): €700,000
• Depreciation of fixed assets: €100,000

Calculation

• EBITDA = Revenue – Operating expenses = 1,000,000 – 700,000 = €300,000
• EBIT = EBITDA – Depreciation = 300,000 – 100,000 = €200,000

The €100,000 difference corresponds to the annual cost of asset wear and tear. If a sale and purchase agreement included an earn-out clause based on achieving an “operating profit” of €250,000, the choice between EBITDA and EBIT would determine whether the condition is met.

Result

• EBITDA indicates that the business generates strong operating results.
• EBIT shows that, once asset usage is considered, profitability is lower.

Both figures are correct, but they tell different stories.

When should EBITDA be used?

EBITDA is particularly useful when you want to:

• Compare companies in the same sector with different depreciation policies and debt levels.
• Analyse operating efficiency without the accounting “noise” of non-cash expenses.
• Assess debt repayment capacity.
• Prepare information for banks or investors.
• Company valuation (M&A): applying EBITDA multiples is common to obtain a preliminary valuation.

It is widely used in financing, company valuation, and preliminary profitability analysis.

That said, it should always be used with caution: EBITDA is not cash flow or final profit.

When should EBIT be used?

EBIT is more appropriate when you want to:

• Analyse the business’s real profitability in the medium and long term, as it considers the need to reinvest in order to maintain productive capacity.
• Assess the sustainability of the business model, especially in industrial or asset-intensive companies (transport, technology, etc.).
• Carry out internal management analysis, since it aligns with official accounting information.

It is especially relevant for industrial companies, asset-intensive businesses, or internal management analysis.

In many cases, EBIT offers a more prudent and realistic view than EBITDA.

EBITDA vs EBIT: which is better?

Neither is inherently “better” than the other. The key is not choosing between them, but knowing what each should be used for.

• EBITDA helps understand the business’s potential.
• EBIT helps understand its economic reality.
• Net profit shows the final impact of all decisions.

A good financial analysis usually combines all three.

Common mistakes when confusing EBITDA and EBIT

• Using EBITDA as if it were cash flow or real profit: this can lead to incorrect dividend distribution decisions or payment defaults, potentially creating liability for directors.
• Ignoring depreciation in asset-intensive businesses: this can create a false sense of profitability and conceal future investment needs.
• Calculating them based on poorly maintained accounts: incorrect classification of income or expenses can distort the indicator, leading to breaches of covenants or incorrect calculations in earn-out clauses.

That is why having well-structured accounting and clear financial reporting is essential.

Relationship between EBITDA, EBIT, and net profit

To gain a complete understanding of the business, it is important to understand the sequence:

1. EBITDA → “pure” operating profitability.
2. EBIT → operating profitability after depreciation and amortisation.
3. Net profit → final result after interest and taxes.

Each level provides different and complementary information.

EBITDA and EBIT: useful tools when interpreted correctly

EBITDA and EBIT are not mutually exclusive indicators, but rather complementary. The former offers a view of the business’s operating cash generation potential, while the latter provides a more prudent measure aligned with accounting reality.

When used correctly, they help businesses better understand their operations and make more informed decisions.

If you want to:

• Correctly calculate EBITDA and EBIT.
• Interpret them in context.
• Prepare reliable financial reporting.
• Or analyse your company’s real profitability.

At Adlanter’s tax and accounting advisory services, we help you with accounting advisory services and financial analysis tailored to every stage of your business.