Premium Fundamental Analysis Course #1: What EBIT and EBITDA Really Mean: A Deep Dive into Financial Metrics

In the world of finance, acronyms abound.

Two acronyms that you've likely encountered are EBIT and EBITDA. But what do these terms really mean, and why are they so important?

They say that nobody actually knows what they mean. *it’s a joke*

Let's demystify these financial metrics and explore their significance in the business world.

The Financial Statement Trifecta

Before we dive into EBIT and EBITDA, it's crucial to understand where these metrics fit in the grand scheme of financial reporting. There are three primary financial statements that businesses use:

1. Balance Sheet: A snapshot of what a company owns and owes at a specific point in time.

2. Income Statement: An overview of the profit or income generated during a specific period.

3. Cash Flow Statement: A breakdown of cash generation and expenditure over a period.

EBIT and EBITDA are both income statement metrics, providing insight into a company's operational performance.

Decoding the Acronyms

• EBIT: Earnings Before Interest and Taxes

• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization

In both cases, "Earnings" is synonymous with income or profit. The "Before" in these acronyms indicates that certain items are being excluded from the operational performance metric.

Why Exclude These Items?