EBITDA vs EBIT vs Operating Profit: Definitions, Differences, and Comparison

Graziano Stefanelli
May 19
4 min read

Let’s break down EBITDA, EBIT, and Operating Profit—clarifying their definitions, how they’re calculated, where they differ, and when each should be used in financial analysis and valuation.

Though often grouped together, these metrics reflect different levels of profitability: EBITDA strips out non-cash costs, EBIT includes non-operating income, and Operating Profit focuses strictly on core business performance.

____________

1 Overview

Operating Profit (also called Operating Income) measures the earnings generated by the core business after every operating cost—cash or non-cash—has been recognised;

EBIT (Earnings Before Interest and Taxes) starts with Operating Profit and then folds in all non-operating, pre-tax gains and losses;

EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortisation) rewinds one step further by adding back the non-cash depreciation and amortisation (D&A) charges to EBIT.

____________

2 Position on the income-statement ladder

Revenue

– Cost of goods sold (or "Cost of Sales" in case of service business)

= Gross profit

– Operating expenses (selling, G&A, R&D, D&A, etc.)

= Operating profit

± Non-operating income/expenses (royalties, investment gains, FX effects, hedging, etc.)

= EBIT

+ Depreciation & amortisation add-back

= EBITDA

– Interest

– Taxes

= Net profit

✦ Operating Expenses are the recurring costs required to keep the core business running. These include salaries and wages, office rent, utilities, insurance, advertising, IT support, repairs, travel expenses, depreciation of machinery, and R&D costs. They exclude financing and investment-related costs;

✦ Non-Operating Income refers to gains not generated by normal operations. Examples include interest income from bank deposits, dividends from equity investments, profits from selling fixed assets or subsidiaries, fair-value gains on financial instruments, and rental income from properties not used in operations;

✦ Non-Operating Expenses are losses or costs unrelated to the main business. These may include interest on loans, losses from asset disposals, impairment losses, currency exchange losses, restructuring costs, litigation expenses, and one-time write-offs or penalties.

Moving horizontally from Operating Profit to EBIT adds or subtracts results that are outside normal operations but still precede financing and tax.
Moving vertically from EBIT to EBITDA removes D&A to approximate pre-capex cash flow.

____________

3 Calculation shortcuts

Metric	Base number	Adjustments	Common shortcut
Operating Profit	Revenue	– COGS – Operating Opex (incl. D&A)	—
EBIT	Operating Profit	± Non-operating pre-tax items	Operating Profit ± Non-operating items
EBITDA	EBIT	+ Depreciation + Amortisation	EBIT + D&A

Because EBIT = Operating Profit ± non-operating items, the strict identity is EBITDA = EBIT + D&A = Operating Profit ± non-operating items + D&A

Any non-operating swings (good or bad) therefore flow straight into EBITDA.

____________

4 What each metric tells you

Question	Operating Profit	EBIT	EBITDA
Is core operations profitable after fully charging the assets?	✅	Partially diluted by non-operating items	❌ D&A removed
How big is the effect of non-operating activities?	—	✅ Captures it explicitly	✅ Same plus D&A add-back
How much cash might be available for debt service (rough view)?	Moderate proxy	Moderate proxy	✅ Strongest headline proxy
Reflects capital intensity?	✅ Heavy assets depress margin	✅ Still visible	❌ Neutralises asset base
Favourite for valuation multiples	EV/Operating Profit, P/Op P	EV/EBIT	EV/EBITDA (headline)
Debt-covenant standard	Sometimes	Often	Very common
Susceptible to “window dressing”	Low	Moderate	High—frequent use of “Adjusted EBITDA”

____________

5 Illustrative example (EUR millions)

	Software Co.	Steel Co.
Revenue	200	200
Cash operating expenses	120	100
Depreciation & amortisation	4	40
Operating Profit	76	60
Non-operating investment gain	0	15
EBIT	76	75
+ Depreciation & amortisation	+4	+40
EBITDA	80	115

Interpretation

The software firm outperforms on Operating Profit, reflecting a lighter asset base.
The steel producer catches up on EBIT due to a one-time investment gain.
On EBITDA the steel mill appears superior, because depreciation—its biggest accounting drag—is stripped away.

____________

6 Strengths and blind spots

Operating Profit

Strengths

Direct lens on managerial efficiency, pricing and cost control.
Full burden of asset wear captured through D&A.

Blind spots

Ignores non-operating income that may be recurring (e.g., royalty streams).
Not the metric lenders typically use in covenants.

EBIT

Strengths

Shows effect of strategic side bets (investments, hedging, property income).
Still pre-financing and pre-tax, making cross-capital-structure comparisons easier.

Blind spots

More volatile than Operating Profit; can swing on fair-value marks.
Capital-intensity differences remain baked in via D&A.

EBITDA

Strengths

Good first-pass proxy for cash that could service debt or fund growth.
Levels the playing field between asset-light and asset-heavy businesses.
Benchmark of choice in M&A screening and syndicated-loan markets.

Blind spots

Excludes maintenance capex, working-capital swings and interest—so it is not cash flow.
Highly adjustable; “Adjusted EBITDA” definitions vary widely.
Can disguise over-leveraged balance sheets if relied on alone.

____________

7 Practical use cases

Decision	Preferred metric	Rationale
Pricing, budgeting, cost benchmarking	Operating Profit	Focus on controllable operating levers and asset burden
Intra-division comparison in conglomerates	Operating Profit	Non-operating items booked centrally would distort EBIT/EBITDA
High-level acquisition screening	EBITDA	Quick, capital-structure-neutral yard-stick for many targets
Bank covenant negotiation	EBITDA (or EBIT)	Lenders look at pre-interest cash-generation capacity
Long-term shareholder-value analysis	Operating Profit + Free-Cash-Flow	Captures true operating economics and reinvestment needs

____________

8 Common analytical traps

Treating EBITDA as cash flow: it omits maintenance capex and working-capital changes.
Ignoring recurring non-operating gains/losses: EBIT and EBITDA include them by definition; if they recur, exclude at your peril.
Assuming “EBITDA = cash available for dividends”: interest, tax, capex and debt amortisation still lie ahead.
Overlooking the effect of inflation on D&A: historical-cost depreciation can understate economic wear, flattering EBITDA.
Relying on management-defined “adjusted” numbers: always reconcile to the audited figure.

____________

9 How the three metrics fit together

Think of a three-layer funnel:

Operating Profit shows what the engine earns after the cost of fuel, labour, and asset wear.
EBIT widens the scope to include income or losses from side activities attached to the engine—still before financiers and tax authorities show up.
EBITDA rewinds depreciation and amortisation to approximate the raw cash energy that could power future investments or service debt.

Used together—rather than in isolation—they reveal not only how much a firm earns but also where those earnings arise and how fragile they might be under different capital-spending or financing scenarios.

___________