WST: 1.3 Accounting - EBIT & EBITDA Explanation

Wall St. Training Self-Study Instructor, Hamilton Lin, CFA explains the importance of EBITDA and EBIT as profitability and valuation metrics. EBITDA is perhaps one of the most importance terms, although not an official accounting statement item. When junior professionals ask "why EBITDA", all too often, the reply is "that's just the way it is". We explain the "why" in easy to understand terms and dig into the detail of such important terms.

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[wstss]

@TypicalKid100 No worries. Please let us know if you have any specific questions or if we made an error. Thanks for watching!

[TypicalKid100]

@wstss you didn't, believe I didn't read all of one of the comments I replied to, mea clupa. One could argue all day long about EBIT and was always taught situational awareness is the best course in determining the right calc.

[wstss]

@TypicalKid100 If you are referring to Gross Profit (instead of your Gross Income in your comment), we would agree with you. It’s Revenue less COGS = Gross Profit, before SG&A has been subtracted. Operating Income (or EBIT) is Gross Profit less SG&A, ignoring one-time items, etc. EBIT represents the recurring sustainable profitability from core operations. Can you point to where we said Gross Profit includes SG&A being taken out?

[wstss]

@TypicalKid100 We don’t disagree with you from the academic perspective; however, from the general finance perspective, EBIT and Operating Income are the considered the same. Different people will have different definitions, no doubt.

[TypicalKid100]

@botchalism think you're confused. Gross Income doesn't include SG&A, however Op. Inc. does. This makes sense, SG&A is the cost/expense in supporting the operations of the business, and although SG&A isn't the cost incurred in turning inventory into a recordable sale (that's your COGs) it's function is vital to making the process possible, ergo it's logical that it's included in Inc. from Operations.

[TypicalKid100]

@hhaassaann134 EBIT and Operating Income differ in that (at least how I was taught at my bank) EBIT is "scrubbed" of any non recurring expenses/expenses that aren't "good" barometers of the company's assets ability to generating cash flow. E.g. legal fees, stock based compensation, impairments or gains from write down/up of assets, etc.

[Changtangtang]

@botchalism SG&A is non-operating exp???? Where did you learn that from?

[botchalism]

@gwenyi No it is not, Operating Income does not include non-operating expenses (Selling and Administrative Expenses). EBIT on the other hand DOES include it. They are closely related but still different.

[TheStormPulse]

thx a million for this video!!

[gwenyi]

@hhaassaann134 it's the same thing.