Earnings Before Interest, Tax and Depreciation (EBITD): Overview

What Is Earnings Before Interest, Tax and Depreciation (EBITD)?

Earnings before interest, tax and depreciation (EBITD) is used as a tool to indicate a company's financial performance. It is calculated as:

Revenue – Expenses (excluding taxes, interest and depreciation) = EBITD

Users of this calculation attempt to gauge a firm's profitability prior to any legally required payments, such as taxes and interest on debt, being paid. The idea behind removing depreciation is that depreciation is an expense the firm records, but does not necessarily have to pay in cash.

Understanding Earnings Before Interest, Tax and Depreciation (EBITD)

EBITD is very similar to earnings before interest, taxes, depreciation and amortization (EBITDA), but the latter calculation excludes amortization.

The difference between amortization and depreciation is subtle, but worth noting. Depreciation relates to the expensing of the original cost of a tangible asset over its useful life, while amortization is the expense of an intangible asset's cost over its useful life. Intangible assets include, but are not limited to, goodwill and patents, and are unlikely to represent a large expense for most firms. Using either the EBITD or EBITDA measures should yield similar results.

A company’s EBITD is determined by looking at line items on its income statement. For example, Company X reported sales revenue of $10 million for a given year, with an operating profit of $6 million after deducting expenses such as employee salaries of $2 million, rent and utilities of $1 million and depreciation of $1 million. Company X will pay $500,000 in taxes. Its EBITD would be calculated by taking the operating profit of $6 million and adding back the depreciation and taxes for an EBITD of $7,500,000.

Limitations of Earnings Before Interest, Tax and Depreciation (EBITD)

Some analysts do not favor using EBITD, saying that the calculation does not represent an accurate financial picture of companies that carry a high load of debt, spend a significant portion of capital on upgrading equipment or hold a significant amount of intellectual capital, since EBITD doesn’t account for property like trademarks or patents.

Like EBITDA, EBITD is not recognized as a Generally Accepted Accounting Principle (GAAP). The calculation may allow companies more wiggle room for what they do and don’t include in their numbers, as well as allowing them to vary what they include from reporting period to reporting period. While being a useful tool for evaluating a company’s profitability, it’s less helpful at representing cash flow, and gives room for companies to tweak their data in the interest of appearing more profitable than the company actually is.