EBIT and EBITDA in plain words

Bank managers and accountants use two words that sound like a sneeze: EBIT and EBITDA. They're just versions of profit, with certain costs added back.

EBIT

EBIT stands for earnings before interest and tax. You start with profit before tax and add back the interest bill.

Why take interest out? Because it shows what the farm itself earns, before it pays for its debt. Two farms could run exactly the same way and have very different interest bills, just because one borrowed more. EBIT lets you compare the farming, not the borrowing.

EBITDA

EBITDA stands for earnings before interest, tax, depreciation and amortisation. Amortisation is like depreciation, but for things you can't touch, such as a licence. Most farms have little or none.

EBITDA is EBIT with depreciation added back. Because depreciation isn't cash, EBITDA is closer to the cash the business earns from farming in a year.

How the bank uses them

The bank often uses EBIT for interest cover. That's EBIT divided by interest, and it tells you how many times profit covers the interest bill. If interest cover is 3 times, profit could fall a long way before the farm couldn't pay its interest.

The bank often starts from EBITDA for debt service cover. That compares the cash earned with interest and principal together, often after taking off drawings. Banks work these out in different ways, so check the wording in your own facility letter. Our course on how the bank looks at your farm goes further.

Working it out yourself

Find three numbers in your profit and loss:

1. Profit before tax.
2. Interest.
3. Depreciation.

Then:

• EBIT = profit before tax + interest
• EBITDA = EBIT + depreciation

Watch for one-off items

One-off items can blur the picture. A big insurance payout or the sale of a block can lift profit in one year. When you compare years, note anything unusual, and ask your accountant if you're not sure what a line is. The bank will usually look past one-offs to what the farm earns in a normal year, so it helps if you do too.

The bank ratio check does these sums for you and shows the main ratios side by side.