EBT vs PBT, EBIT vs PBIT

We would once again like to drawn your attention the fact, that none of these are GAAP approved, which explains the debates about how these indicators should be understood. Probably the most complex of them all is how we should understand the first letter “E”. Earnings are not equivalent to profit. Aiming for a more accurate evaluation of the situation of the enterprise and its’ profit, the enterprise could calculate the EBITDA and its’ secondary values. EBITDA is the profit, calculated excluding the interest, taxes, depreciation and amortization. EBITDA can be used to compare the profitability of separate given segments. This brings us the conclusion, that EBITDA equals the revenue for the service provided minus total costs plus interest costs plus depreciation plus amortization.

So what’s the catch here? Basically this means that, according to a popular belief, calculating the earnings excludes income and expenditure from unusual, non-recurring or discontinued activities. Usually we can’t separate that clearly in standard reports. This allows us to assume, that these costs are revenue never existed and this is what make earnings and profit interchangeable.

Financial indicators: EBITDA, EBIT, EBT and their profitability

The EBT, EBIT and EBITDA are considered indicators of profitability, they indicate an expanded value of the net (earnings before, EB) profit and in most of the cases they are considered in proportion with the sales revenue. We will now proceed to learn more about them per se. We will now concentrate more on the EBIT and EBITDA indicators and leave the EBT aside, mostly because being equivalent to the well-known profit (loss) before taxes indicator, it is already widely known and used.

Nobody doubts that EBIT and EBITDA are important values when calculating many of the profitability indicators. What’s so special about them? Maybe we could get by just using one of them, or maybe we need more than those two? Truth is, there are many more other “EB’s”, however, we would need another article to cover those properly, which is why now we find it sufficient to only mention some of them. One of them is the EBITDAR indicator, (earnings before interest, taxes, depreciation, amortization, and rent (or in some cases, restructuring fees), which is often used in a proportion with total debt. It is the same EBITDA but reduced rent costs.  If we reduced from EBITDA benefits to state we will then have the EBITDARM (earnings before interest, taxes, and depreciation, amortization, rent and management fees). Some oil or other resource extraction enterprises use the EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion, Amortization and Exploration Expenses), the list goes on and on, but we find it reasonable to just stick to the indicators we mentioned before.

News about the EBITDA calculations

The enterprise could calculate the EBITDA and its’ secondary values. EBITDA is the profit, calculated excluding the interest, taxes, depreciation and amortization. EBITDA can be used to compare the profitability of separate given segments. According to their example, we get the following formula:

EBITDA = income for the service provided – overall costs + interests costs + depreciation + amortization

Formulas, used to calculate these values, are not at all complex. The more difficult task is to settle the debate about the notions we use, for, as you have already seen, these three indicators are not approved by GAAP. To our mind, a convenient way (especially with a limited access to the information about the enterprise), is the bottom-up calculation. That means that to the basic value – the profit – we add up the rest. Having said this, it’s high time we looked into the formulas. In order to simplify them, let’s settle the abbreviations we’ll use.  

EBITDA, EBIT and EBT – what are these?

We should probably start by explaining, that EBITDA is an English acronym, thus pronounced as “ee-bit-dah”. Be that as it may, pronunciation is hardly the most important part – it’s more important to be able to count it, and to figure out what we have actually gotten. EBITDA is interpreted as earnings before interest, taxes, depreciation and amortization. Even though at the first glimpse this might sound confusing, it actually isn’t. It is worth emphasizing, that EBITDA is not a GAAP indicator, which stands for Generally Accepted Accounting Principles. These way different enterprises may explain the concept of earnings before interest, taxes, depreciation, and amortization, and still both are right. On one hand, for example, one might perceive interest as a financial result of an enterprise; on the other hand, it could also be understood as a difference between the paid and the received interest. Therefore, let’s be alert.

What EBITDA illustrates?

While EBITDA is a quite informative and widely used indicator, which helps to manage the company’s finances, using this indicator alone in determining the profitability of the company or the cash flows may be incorrect, or even disastrous.

In particular, EBITDA should not be used as an indicator of cash flows. Taxes and interest that is to be paid have a direct impact on cash flows. But it is therefore logical that the company, which doesn’t pay taxes, can’t survive long. EBITDA also doesn’t evaluate working capital changes and cash needed to continue the daily activities. Particularly when viewed in emerging and fast growing company that uses the money in financing accounts receivable and fixed asset acquisitions.

In such cases, it may happen that the EBITDA is high and cash flow from operations is negative. It is obvious that EBITDA portrays the financial situation in bright colors. Capital investment in the company is also vitally important, and EBITDA ignores this fact. So, if the EBITDA of the company is about 0, it does not mean that the company has survived because it will not be enough funds major renovation measures. Famous investor Warren Buffet once said: “Shall the management believe that the capital investment costs are paid by the tooth fairy? “  The EBITDA alone isn’t enough of an indicator of insufficient assessment of the company or its shareholder value.