What are EBT, EBIT, and EBITDA?

EBT, EBIT, and EBITDA are some of the most common non-GAAP accounting metrics that companies report. Each is a rough guide to how much cash a business generates while highlighting different things.

Each is an acronym that backs out different things before earnings.

EBT stands for earnings before taxes.

EBIT stands for earnings before taxes and interest.

EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization.

How are EBT, EBIT, and EBITDA calculated?

Calculating EBT and EBIT requires information from the company's income statement. EBITDA's calculation requires figures from a company's income and cash flow statements.

EBT = Revenue - COGS (cost of goods sold) - operating expenses + other income

EBIT = Revenue - COGS - operating expenses

EBITDA = Revenue - COGS - operating expenses + depreciation + amortization

Operational insights

EBT, because it backs out taxes from earnings, highlights a business's profitability before taxes.

EBIT excludes the effects of financing and taxes from operating profitability.

EBITDA excludes the effects of depreciation and amortization on operating earnings.

Pros and Cons of EBT and EBITDA

The cable industry pioneer John Malone developed the metric in the 1970s to sell investors on his company’s true profitability, which he believed was not accomplished by GAAP figures such as earnings per share.

Charlie Munger, Warren Buffett’s famed business partner, called EBITDA "bulls**t earnings" because it did not always accurately reflect a company’s earnings.

For instance, because EBITDA does not consider all business activities, it might overstate cash flow.

It also backs out depreciation and amortization as expenses.

Depreciation is when a tangible asset's value is gradually reduced over time to account for wear and tear. For instance, a new piece of factory equipment is worth more than it will be after years of heavy use.  

What depreciation is for a physical asset, amortization is its counterpart for intangible assets, usually financial instruments like a loan.

Usually, when companies report non-GAAP results, they back out depreciation and amortization because no cash is leaving the company based on either of these metrics when the report is made.

However, factory equipment needs to be replaced eventually, so depreciation is a very real expense over the life of a business.

Buffett and Munger prefer to look at EBT, which stands for earnings before taxes.

This allows them to compare a business's earnings yield to a bond’s (which is also a pre-tax number).

Key formulas using these metrics

EBT Formulas

Net income = EBT - taxes

Effective tax rate = (Taxes/EBT) * 100

Market cap / EBT = Pre-tax earnings yield

EBIT Formulas

Interest coverage ratio = EBT/Interest expense

Return on capital employed = EBIT/(Total assets - current liabilities)

EBITDA Formulas

EBITDA margin = (EBITDA/Revenue) * 100

Enterprise value to EBITDA = Enterprise value/EBITDA

Free cash flow = EBITDA - CapEx - change in net working capital - taxes