EBIT vs EBITDA
EBIT is operating profit before interest and tax. EBITDA adds depreciation and amortisation back. On $100,000,000 of EBIT and $20,000,000 of D&A, EBITDA is $120,000,000. Free cash flow on that same sheet is $55,000,000, because tax, capex and working capital still have to come out.
| EBIT | EBITDA | |
|---|---|---|
| What it starts from | Operating profit after D&A. | That same profit, with D&A added back. |
| Teaching sheet | EBIT $100,000,000. Tax at 25 percent is $25,000,000. NOPAT is $75,000,000. | D&A $20,000,000, so EBITDA is $120,000,000. |
| After the rest of the bridge | NOPAT $75,000,000 plus D&A minus $30,000,000 of capex minus a $10,000,000 working-capital increase is FCF of $55,000,000. | EBITDA never took those lines off. The $120,000,000 is not the $55,000,000. |
| A working-capital release | NOPAT stays $75,000,000. FCF becomes $70,000,000 when working capital falls rather than rises. | EBITDA is still $120,000,000. The working-capital line is not in it. |
| Heavier capex | FCF falls to $35,000,000 when capex is $50,000,000. EBIT did not move. | EBITDA did not move either. Capex is not in it. |
| When you would pick it | A starting point for NOPAT and unlevered free cash flow. | A denominator for EV/EBITDA, knowing it is not cash. |
On this page
D&A is the whole gap
EBITDA is EBIT plus depreciation and amortisation. On the teaching sheet EBIT is $100,000,000 and D&A is $20,000,000, so EBITDA is $120,000,000. That add-back is the entire difference.
Tax still sits on EBIT: 25 percent of $100,000,000 is $25,000,000, and NOPAT is $75,000,000. Capex of $30,000,000 and a $10,000,000 working-capital increase then take FCF to $55,000,000. EBITDA skipped every one of those lines.
How free cash flow works is the bridge. EBITDA against free cash flow is the cash question. This page is the D&A add-back on its own. EBITDA is the definition. Free cash flow is what the add-back is not.
Neither one is cash
EBIT deducted D&A, which did not spend cash this period. EBITDA put it back, and then stopped. The cash that bought the asset is capex, on its own line, in the period it was spent. Calling $120,000,000 cash overstates what the operations can distribute by the tax, capex and working-capital gap down to $55,000,000.
This is educational material, not financial advice.
Worked examples
The five-line teaching sheet
EBIT $100,000,000, tax 25 percent, D&A $20,000,000, capex $30,000,000, working capital up $10,000,000. What are EBIT, EBITDA and FCF?
- Tax: $25,000,000. NOPAT: $75,000,000.
- EBITDA is EBIT plus D&A: $120,000,000.
- FCF: $55,000,000.
EBIT is $100,000,000. EBITDA is $120,000,000. NOPAT is $75,000,000. Unlevered free cash flow is $55,000,000.
Working capital as a source
Keep EBIT, tax, D&A and capex. Working capital falls, delta -5000000.
- NOPAT is still $75,000,000. EBITDA is still $120,000,000.
- FCF becomes $70,000,000.
EBITDA is still $120,000,000. Free cash flow is $70,000,000. The working-capital release moved FCF, not EBITDA.
Heavier capex
Capex is now $50,000,000. Working capital up $10,000,000 again.
- EBIT and EBITDA do not move: $100,000,000 and $120,000,000. NOPAT is still $75,000,000.
- FCF falls to $35,000,000.
EBITDA is still $120,000,000. Free cash flow is $35,000,000. Capex of $50,000,000 is what moved FCF.
Common questions
Is EBITDA a cash earnings figure?
No. On this sheet it is $120,000,000 and free cash flow is $55,000,000. The gap is tax, capex and working capital.
Why add D&A back at all?
Because it reduced EBIT without spending cash this period. The cash that bought the asset is capex. Adding D&A back and then stopping, which is EBITDA, leaves that cash uncounted.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.