EBIT (earnings before interest and taxes) deducts depreciation and amortization, while EBITDA (earnings before interest, taxes, depreciation, and amortization) adds those non-cash expenses back. In a 2016 CFA Institute survey of 431 analysts and portfolio managers cited by the International Accounting Standards Board (IASB), 69.8% of investors used unadjusted EBITDA and 45.9% used EBIT. Use EBITDA to compare companies with similar capital needs but different depreciation schedules, and use EBIT when capital intensity varies across peers. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free enterprise value calculator with no sign-up, and mock technical interviews where an AI interviewer tests your valuation multiples and cash flow bridges out loud.
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Both metrics measure performance before financing costs and income taxes. The split comes down to how you treat wear and tear on physical and intangible assets, and how accounting regulators classify the starting line.
Earnings before interest and taxes deducts depreciation and amortization, reflecting the ongoing cost of capital assets.
Earnings before interest, taxes, depreciation, and amortization adds back non-cash D&A to compare peers with different depreciation policies.
In an interview, knowing why EBIT and operating income differ sets you apart. Under US Securities and Exchange Commission (SEC) staff guidance (last updated December 13, 2022), the word 'earnings' in both EBIT and EBITDA means GAAP net income as presented in the statement of operations.
EBIT vs. EBITDA comparison across regulatory and valuation rules
| Feature | EBIT | EBITDA |
|---|---|---|
| Full name | Earnings before interest and taxes | Earnings before interest, taxes, depreciation, and amortization |
| Standard formula | EBIT = GAAP Net Income + Interest + Taxes | EBITDA = GAAP Net Income + Interest + Taxes + Depreciation + Amortization |
| Depreciation and amortization | Deducted as an expense | Added back (excluded from expenses) |
| SEC definition of 'Earnings' | GAAP net income | GAAP net income |
| Required SEC reconciliation target | GAAP net income (not operating income) | GAAP net income (not operating income) |
| Per-share presentation in SEC filings | Prohibited | Prohibited |
| Investor usage (2016 CFA survey via IASB) | 45.9% unadjusted, 38.3% adjusted | 69.8% unadjusted, 65.9% adjusted |
| Primary valuation multiple | EV/EBIT (preferred when capital intensity varies across peers) | EV/EBITDA (preferred when depreciation policies differ) |
SEC reconciliation
Because true EBIT starts from net income and only adds back interest and taxes, it still includes non-operating items like investment income or gains and losses that sit below the operating income line. For that reason, the SEC states that when a company presents EBIT or EBITDA as a performance measure, it must reconcile the figure to GAAP net income, not to operating income.
What is EBITDA, and why do bankers use it?IASB distinction
International standard-setters draw the same distinction. In an October 2021 staff paper for the Primary Financial Statements project, the IASB refused to describe its specified subtotal 'operating profit or loss before depreciation and amortization' as EBITDA. The IASB noted that doing so would imply operating profit is the same as earnings before interest and tax, which is not always true because operating profit excludes items such as income from investments or from equity-accounted associates and joint ventures.
IASB illustrative lines
Under the IASB's proposed income statement structure, operating profit and true EBIT sit several lines apart. In the IASB's illustrative statement of profit or loss by nature, an entity reports Revenue of 15,500 and Operating profit before depreciation and amortization of 5,000 (after a 500 PPE impairment). Deducting depreciation of 1,200 and amortization of 800 yields Operating profit of 3,000. Adding 500 from integral joint ventures and associates, 250 from financial asset fair value changes, 50 in dividend income, and 100 from non-integral joint ventures reaches Profit before financing and income tax of 3,900.
While EBITDA is one of the most commonly used measures in financial communications, the IASB noted it is not used in some industries like finance. According to the IASB's November 2018 research paper on EBITDA, investors, analysts, and lenders use both EBIT and EBITDA for four main tasks: comparing historical financial performance (such as EBITDA margin and growth), assessing debt service capability and credit risk (through interest coverage and net debt/EBITDA ratios), running multiples analysis, and forecasting operating cash flows.
Why investors use EBITDA
IASB staff identified two reasons why some investors, analysts, and lenders prefer EBITDA over EBIT: it adjusts for non-cash expenses to build a rough proxy for operating cash flows, and it eliminates accounting distortions when two companies use different depreciation policies (such as different useful life assumptions). During IASB outreach, some investors explained that they view depreciation and amortization as discretionary accounting figures with limited predictive value. Instead of relying on a company's reported depreciation schedule, these investors use EBITDA as a clean baseline and model future capital expenditures separately.
Warning 1: Solvency
That shortcut breaks down when you compare companies with very different capital needs. Interest coverage ratios based on EBITDA (EBITDA divided by interest expense) can overstate a company's ability to pay its debts because EBITDA ignores the actual cash required for ongoing capital expenditures.
Warning 2: Multiples
The EV/EBIT multiple is often more appropriate than EV/EBITDA when capital intensity varies significantly among the companies you are comparing.
To see why EV/EBIT catches capital intensity when EV/EBITDA misses it, walk through this comparison of two hypothetical businesses. (Worked example written by our team. The companies and numbers are invented for illustration.) Suppose you are advising a private equity client comparing two logistics businesses, FleetOwn Corp and AssetLight Logistics. Both companies have an Enterprise Value (EV) of $1,000 million and generate $500 million in annual revenue.
Worked example: Invented comparison of capital intensity in valuation multiples
| Metric | FleetOwn Corp (Capital-Heavy) | AssetLight Logistics (Asset-Light) |
|---|---|---|
| Enterprise Value (EV) | $1,000M | $1,000M |
| Revenue | $500M | $500M |
| EBITDA | $200M (40% margin) | $200M (40% margin) |
| Depreciation and amortization | $100M | $10M |
| EBIT | $100M (20% margin) | $190M (38% margin) |
| EV/EBITDA multiple | 5.0x | 5.0x |
| EV/EBIT multiple | 10.0x | 5.26x |
Step 1: Compare EBITDA
FleetOwn owns all of its trucks and warehouses. Before depreciation, its operating costs are $300 million, giving it an EBITDA of $200 million ($500M minus $300M) and an EBITDA margin of 40%. AssetLight leases third-party carriers on short-term contracts, paying $300 million in operating expenses. AssetLight also has an EBITDA of $200 million and an EBITDA margin of 40%.
Step 2: EV/EBITDA
Dividing the $1,000 million Enterprise Value by $200 million in EBITDA gives both companies an identical EV/EBITDA multiple of 5.0x. On an EBITDA basis, they look equally priced.
Step 3: Deduct D&A
FleetOwn must replace its trucks every few years. It records $100 million in annual depreciation and amortization, which closely matches its yearly cash spending on replacement trucks. Its EBIT is $100 million ($200M minus $100M), for an EBIT margin of 20%. AssetLight owns almost no physical equipment and records only $10 million in annual depreciation. Its EBIT is $190 million ($200M minus $10M), for an EBIT margin of 38%.
Step 4: EV/EBIT
FleetOwn trades at an EV/EBIT multiple of 10.0x ($1,000M divided by $100M). AssetLight trades at an EV/EBIT multiple of 5.26x ($1,000M divided by $190M).
When you read real company filings, you rarely see a uniform EBITDA calculation. In its review of 85 non-financial entities applying IFRS Standards across various industries and geographies, IASB staff found that 72 entities (84.7% by our calculation from the IASB sample) used EBITDA inside or outside their financial statements (and 73 in 2020), while 13 entities did not use it at all.
Where it appears
Among the 72 entities using EBITDA, 41 used it both inside and outside the financial statements, 1 used it only inside, and 30 used it only outside (such as in earnings releases or investor presentations). Inside the financial statements (42 entities total), EBITDA was most commonly used as a segment performance measure under IFRS 8 (23 entities, or 54.8% by our calculation) or in disclosures about capital structure and debt covenants, such as targeting a net debt/EBITDA ratio under 2 (18 entities). Only 4 entities presented it as a subtotal on the income statement, and 2 presented it on the cash flow statement using the indirect method.
Calculation differences
The IASB's December 2018 and October 2021 papers exposed how differently companies calculated the number. In the IASB staff review of 85 non-financial entities from 2018 to 2020, the share of disclosing entities that adjusted their EBITDA-type measures for impairments rose from 63% in 2018 to 72% in 2019 and 74% in 2020 (in the December 2018 paper, 32 of 72 entities added back impairment and 14 did not, of which 9 incurred impairments, while 28 adjusted for unusual or infrequent items). On associates and joint ventures, 18 entities included the share of profit from associates and joint ventures in EBITDA, while 22 entities excluded it. Despite making extra adjustments, 28 of the 72 entities still labeled the measure simply as 'EBITDA', while only 18 entities reflected the adjustments in the title by calling it 'Adjusted EBITDA' or 'underlying EBITDA' (26 entities provided no definition).
IAS 36 vs. IFRS 9
Depreciation, amortization, and impairments are all non-cash expenses, and during IASB consultations one institutional user described impairments as 'depreciation and amortization catch-up adjustments' tied to past investment decisions rather than current operations. However, IASB staff drew a sharp line between two kinds of impairments under IFRS Standards. Non-financial asset impairments under IAS 36 (property, plant, and equipment, goodwill, intangible assets, and right-of-use assets) are non-cash charges resulting from specific loss events, and IASB staff recommended excluding IAS 36 impairments from the specified operating profit subtotal (labeling it 'operating profit or loss before depreciation, amortization, and specified impairments'). By contrast, financial asset impairments under IFRS 9 (expected credit losses on trade receivables, contract assets, and finance lease receivables) should not be excluded because they have a 'cash-like' nature: recognizing an expected credit loss on a receivable signals that the company expects to collect less cash in future periods.
From SEC Division of Corporation Finance: Non-GAAP Financial Measures C&DIs (updated December 13, 2022), SEC Final Rule: Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176 / 34-47226 (effective March 28, 2003), IASB Staff Paper Agenda Ref 21D: Operating profit or loss before depreciation and amortization (October 2021), IASB Staff Paper Agenda Ref 21A: Primary Financial Statements, EBITDA (November 2018) and IASB Staff Paper Agenda Ref 21B: Primary Financial Statements, EBITDA (December 2018).
For investment banking and private equity interviews in the US, you need to know how the SEC regulates EBIT, EBITDA, and Adjusted EBITDA under Regulation G and Item 10(e) of Regulation S-K (adopted in Release No. 33-8176, effective March 28, 2003).
Whenever a company presents a non-GAAP measure like EBITDA in an SEC filing or an earnings release furnished under Item 2.02 of Form 8-K, it must present the most directly comparable GAAP measure (net income) with equal or greater prominence. Presenting EBITDA in a headline before net income, using a larger or bold font for EBITDA, or starting a reconciliation table with the non-GAAP number violates the rule.
SEC rules generally prohibit non-GAAP liquidity measures from excluding charges or liabilities that require cash settlement. Standard EBIT and EBITDA are specifically exempted from this ban (even though interest and taxes are paid in cash). However, if a company modifies the formula, it must use a distinct title such as 'Adjusted EBITDA', and that modified measure loses the automatic exemption.
If a company's credit agreement contains a material covenant using 'Adjusted EBITDA' (which excludes cash-settled charges), the company may still disclose it in Management's Discussion and Analysis (MD&A) if the agreement and covenant are material to understanding liquidity. The company should disclose the material terms of the credit agreement, the required covenant limit, and the likely effects of compliance or non-compliance.
Item 10(e) prohibits describing an adjustment as 'non-recurring, infrequent or unusual' if a similar charge or gain occurred within the prior two years or is reasonably likely to recur within two years. Furthermore, under Rule 100(b) of Regulation G, excluding normal, recurring, cash operating expenses necessary to operate the business can make a non-GAAP performance measure materially misleading, even if the company provides full reconciliation disclosures (Question 100.06).
From the SEC: SEC Division of Corporation Finance: Non-GAAP Financial Measures C&DIs (updated December 13, 2022) and SEC Final Rule: Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8176 / 34-47226 (effective March 28, 2003).
Say your answer out loud before comparing it to our team's model response below. The practice prompt and sample answer are Soreno's own, written for an invented applicant.
How to compare two targets with different equipment ownership and explain why neither metric equals operating cash flow.
We are valuing two manufacturing targets. One leases its factory equipment and the other buys its machinery outright. Should we compare them on EV/EBITDA or EV/EBIT, and which metric is a better proxy for cash flow?
Sample answer. Example answer written by our team. The applicant is invented. I would compare them using EV/EBIT rather than EV/EBITDA. When one manufacturer buys its equipment outright and the other leases, their capital intensity and accounting lines look very different. The company that owns its machines records large depreciation expenses, while the lessee records operating expenses or lease amortization depending on the accounting standard. If we use EV/EBITDA, we add back all depreciation for the owner, making its earnings look artificially high and its multiple look artificially cheap compared to the economic reality that it has to spend real cash to replace that machinery. Deducting depreciation in EBIT puts both companies on a more comparable footing because depreciation acts as an ongoing proxy for replacement capital expenditures. On the second part of your question, neither metric is true operating cash flow. Even if we start with EBITDA because depreciation is non-cash, we still have to adjust for working capital swings, cash taxes, cash interest, and actual capital expenditures before we know how much cash the business generates to service debt.
Leads with a clear decision (EV/EBIT), explains the exact economic distortion caused by capital intensity vs. depreciation add-backs, and directly addresses the cash flow limitation by naming working capital, taxes, interest, and CapEx. Practice it, see a model answer
In banking and consulting interviews, a classic follow-up question is whether EBITDA equals operating cash flow. The answer is no. IASB staff note that EBITDA is often used as a starting proxy, but getting to actual operating cash flow requires further adjustments for working capital movements (such as changes in inventory, receivables, and payables) and other accruals. In addition, members of the Global Preparers Forum (GPF) warned the IASB that EBITDA is a poor proxy for operating cash flows and becomes an even worse proxy under IFRS 15 (Revenue from Contracts with Customers) and IFRS 16 (Leases). Even actual GAAP operating cash flow does not represent the cash a business can freely distribute: under SEC staff guidance (Question 102.07), 'free cash flow' is typically calculated as cash flows from operating activities as presented in the GAAP statement of cash flows, less capital expenditures, and the SEC cautions that companies must not imply free cash flow represents residual cash available for discretionary spending because mandatory debt service requirements or other non-discretionary outlays are not deducted. Use this four-step checklist written by our team from SEC and IASB definitions when asked to bridge from EBITDA to actual cash generation.
Step 1
Confirm whether the starting number is true unadjusted EBITDA (reconciled to GAAP net income) or an Adjusted EBITDA figure that adds back impairments or restructuring.
From SEC Non-GAAP Financial Measures C&DIs (updated December 13, 2022).
Step 2
Subtract cash tied up in growing accounts receivable or inventory, and account for other non-cash accruals to move toward operating cash flow.
From IASB Staff Paper Agenda Ref 21A: EBITDA (November 2018).
Step 3
Remember that EBITDA excludes interest and taxes, both of which require real cash settlement.
Step 4
Subtract the capital expenditures needed to maintain and grow the asset base (arriving at free cash flow), then check mandatory debt principal repayments.
From SEC Non-GAAP Financial Measures C&DIs (Question 102.07).
Soreno's AI interviewer asks when to use EV/EBIT over EV/EBITDA, challenges you on lease accounting and CapEx, and gives you a scored report on your answer.
No. Under SEC staff guidance, 'earnings' in EBIT means GAAP net income, so EBIT includes non-operating items that operating income excludes and must be reconciled to net income. Similarly, the IASB notes that operating profit is not always the same as EBIT because operating profit excludes items such as investment income and profit from equity-accounted associates and joint ventures.
According to IASB research, analysts and lenders use EBITDA to strip out non-cash depreciation and amortization expenses as a starting point for operating cash flows, and to remove distortions caused by different depreciation policies across companies. In a 2016 CFA Institute survey cited by the IASB, 69.8% of investors used unadjusted EBITDA compared to 45.9% who used EBIT.
Use EV/EBIT when capital intensity varies significantly among the companies being compared, as highlighted in IASB research. Because EBITDA ignores depreciation, EV/EBITDA makes capital-heavy businesses look artificially cheap compared to asset-light peers that require far less ongoing capital expenditure.
EBITDA is only a rough starting point and often a poor proxy for actual operating cash flow. It ignores cash needed for capital expenditures, cash interest, and cash taxes, and it omits working capital movements, other accruals, and lease and revenue accounting effects under IFRS 15 and IFRS 16.
No. SEC Compliance and Disclosure Interpretations (Questions 102.05 and 103.02) explicitly prohibit presenting EBIT, EBITDA, or any non-GAAP liquidity measure that measures cash generated on a per-share basis.
Standard EBITDA only adds back interest, taxes, depreciation, and amortization to GAAP net income. Under SEC rules (Question 103.01) and IASB staff proposals, any measure that makes additional adjustments, such as adding back restructuring charges or impairments, cannot be called EBITDA and must be clearly distinguished with a label like Adjusted EBITDA.
