EBT, EBIT, EBITDA: Will the Real Earnings Figure Please Stand Up?

by John Bajkowski

Earnings are the premier financial figure that help investors judge a company’s bottom line and often form the basis for determining the company’s true value or worth. However, if you have picked up a recent annual report or come across a quarterly earnings announcement, chances are that it is filled with a wide array of earnings figures with cryptic and confusing titles.

In an effort to put their best foot forward, companies have moved away from emphasizing earnings determined through generally accepted accounting principles (GAAP) and instead have tried to force the focus on earnings figures described as pro forma, normalized, or cash-based. In particular, earnings before interest, taxes, depreciation and amortization, or EBITDA, has frequently been put forth as the best way to measure performance given a company’s unique circumstances. However, EBITDA figures also typically report performance in a favorable light.

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While all of these measures have their purpose, it is necessary to examine the complete income statement to understand the adjustments and assumptions built into these alternative earnings measures.

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