EBIT vs. EBITDA vs. Net Income: How They Differ, and How New Accounting Rules Affect Them

[@urbanlegendsandtrivia2023]

Thank you. This is a required video for my American Public University graduate school course.

[@financialmodeling]

Thanks for watching!

[@urbanlegendsandtrivia2023]

@@financialmodeling You're welcome!

[@thuynportalios2337]

Thanks for making this video. It is very informative. Just one question though. If we follow the definition of EBIT, for example, for each of the years, we can start with Net Earnings, which is Net Income, and then add back Income Tax expense and Interest expense, this will result in a different number for EBIT. EBIT excludes taxes and interest expense but still includes other non-recurring revenue (other revenue earned) if the formula starts with the bottom line. Unless EBIT doesn't take into account other revenue (Gain on sale of investments, investment income and other), then we just need to focus on Operating Income and ignore all the line items below it.

[@financialmodeling]

We do not recommend calculating EBIT like that. It should really just be "Operating Income" on the Income Statement, sometimes with adjustments for non-recurring charges depending on what you're doing. Starting with Net Earnings or Net Income is never ideal unless you have no other way to calculate it.

[@WhiteCarBlackWheels]

great video! is it unusual that i look forward to these rare videos once a month or so? i work for a boutique PE and its always interesting to see how your mind works vs how my company does its accounting/valuation. thanks!

[@financialmodeling]

Thanks for watching. In an ideal world, I would like to publish more often, but my full-time job is creating, updating, and maintaining our courses and guides (which consist of thousands of videos and thousands of pages worth of text). We release free samples from them periodically on this channel.

[@WhiteCarBlackWheels]

@@financialmodeling yeah i definitely get that, have to focus on the stuff that actually makes you $$. the samples are appreciated though, definitely a fun watch. keep up the good work!

[@russellfernandez57]

Thanks, helps me make more sense of what I'm studying :)

[@financialmodeling]

Thanks for watching!

[@juanhidalgo6858]

Thanks for this thorough explanation!. Plenty of knowledge pills to look at.

[@financialmodeling]

Thanks for watching!

[@abraaogracco9734]

Very nice, thanks!

[@financialmodeling]

Thanks for watching!

[@yungchiehcheng7774]

Hi Brian, Are you interested in doing tutorial video about Credit Analysis and Debt Financing Topics?

[@financialmodeling]

There are some tutorials already here on credit analysis and debt. Take a look at: kzbin.info/aero/PL5hdd9oiuWS_4yyYBr2bGSo1UbnnpHnDu

[@ecineko1]

amazing videos. Feel blessed. One request: would you please consider doing videos on how to value stocks : from a value investing and from growth investing perspective and across different industries so we can learn the different metrics to look at. These are some ideas for your future videos. Thanks a lot again. You are doing a great service. Keep it up.

[@financialmodeling]

Thanks. We have a bunch of valuation case studies and examples here and even more detailed examples in our courses.

[@daniwalker1268]

Great insights!

[@financialmodeling]

Thanks for watching!

[@prakasha7706]

Good info

[@LP-sy3md]

Love all your videos! Thanks for sharing. Will you be interested in making a video on how to evaluate a stock or company for investing purpose? How would you look at the 3 statements on the 10-K? What metrics do you use and how to identify risks? Thanks!

[@financialmodeling]

That topic is too broad for a single, short video, but take a look at the example stock pitches and valuations here for examples.

[@collinsx62]

Great video, thank you.

[@financialmodeling]

Thanks for watching!

[@georgemelas-kyriazi3304]

Thank you. That was very useful, especially as regards to operating lease accounting and to the ambiguity of ebitda. Amazing that ebitda ignores all operating lease/rental payments under IFRS. One company in which I am invested notes that it reports net income under IFRS and adjusted ebitda under GAAP (or non-GAAP). But I am not sure this is true, because a) lease costs are accounted as dep/amort of ROU assets and interest exp related to lease oblig, and b) ebitda is calculated off of net income and adds back the entire dep/amort (from the CF Statement) and the entire finance expense. I think I need to go back to my Excel sheet and recalculate the ev/ebitda valuation. As you recommended, either add back the lease obligation to the EV (and keep the same ebitda) or not include the lease oblig in the EV, but deduct the lease expenses from the ebitda. Thanks very much.

[@financialmodeling]

I can't really say without seeing the company, but yes, you should probably check and adjust their calculations if required. A lot of companies still don't understand the problems that the new(er) lease accounting rules create.

[@gmedia7041]

great video, thanks! Just one question, one company seems o report depreciation and amortization as an expense and the other isn't, but when you calculate Ebitda you treat both the same, you just add it up to ebit, how is that possible? thanks

[@financialmodeling]

Thanks. Depreciation & Amortization are always Income Statement expenses. The only issue is that some companies show them separately and some embed them within other line items (fully or partially). This is why it's best to add D&A from the Cash Flow Statement - because it's the all-inclusive number. If you start with Operating Income on the Income Statement, you'll always start with a number that has deducted the full D&A expense.

[@JASHVEER22]

Keep up the good work

[@financialmodeling]

Thanks for watching!

[@andrebastos3926]

Thanks for the video! Can you give me an example of when does the D&A are important to take into consideration and when it is not? I'm not sure if it is important for industries that require a lot of CAPEX (ex.: gas or airline companies p.e.) or on contrary.

[@financialmodeling]

Depends on what you are trying to do. D&A is more important in industries that depend on physical assets for growth, such as manufacturing. But you might sometimes use EBITDA anyway if you want to "normalize" companies with very different CapEx levels (of course, that also raises questions about the validity of the valuation because capital intensity should matter...). D&A is less important in service-based industries where the growth comes from hiring employees or buying IP (consulting, software, biotech).

[@andrebastos3926]

@@financialmodeling Thank you so much for your answer!

[@didierchampion5443]

Wow! This is some good content here.

[@financialmodeling]

Thanks for watching!

[@shaunsusanto9383]

What should i do when the company doesnt show the d&a on the income stAtement? Should i calculate it manually by cfo-net income- nwc or what?

[@financialmodeling]

Search for the terms in the filings. All companies must disclose D&A somewhere. If not, look it up for comparable companies as a % of revenue and apply the average or median D&A % Revenue to your company.

[@shaunsusanto9383]

@@financialmodeling okay thanks

[@NaomNakh]

could you please provide the files you explained in the video.

[@financialmodeling]

Click "Show More" and then scroll to the links in the video description.

[@abhishektul]

Nice

[@financialmodeling]

Thanks for watching!

[@tylermilsop]

Actually had to change playback speed to .75 -- good info but a fast talker.

[@financialmodeling]

Yes, it's difficult because if you show a video to 10 people, 5 will say it's "too slow," and 5 will say it's "too fast." So the best solution is to allow for different playback speeds, as KZbin does.