Financial Edge - EBIT, EBITDA, and EPS Flashcards
Does EBIT equal operating profit?
No - EBIT is operating profit after accounting for non-recurring items
What is difference between EBIT and operating profit?
Operating profit
+ Non-recurring expenses
+/- Non-core revenues/expenses
+/- income from non-controlled (if applicable)
= EBIT
Why do you often add back D&A to EBIT?
Tries to reconcile the difference in operating profit caused by differences in how a company treats depreciation
Why would you clean EBIT / EBITDA
Try and normalise earnings to ascertain what the true recurring cash flows are going to be moving forward
What are examples of non-recurring items that could distort EBIT or EBITDA if they are not removed?
- Large gains/losses on sales of subsidiaries
- Costs of restructuring
- Costs of laying off workers
- Impairments or write downs
- Fine / penalty
- Litigation costs
- M&A fees
- Integration costs
Where would you find non-recurring items on the financial statements?
Below and above operating profit
Then, check MD&A and footnotes
Why do you need to be careful when adding back D&A from cash flow statement?
D&A on cash flow statement sometimes includes impairments which may have already been added back when calculating EBIT
Need to check footnotes to be sure
Difference between marginal and effective tax rate?
Marginal rate is paid on the next $ of profit before tax, which is usually the tax rate in the company’s main country of operations
Effective tax rate is the average tax rate actually expensed. Usually lower than marginal, as company benefits from selling items in countries that have more favourable tax regimes.
How to calculate effective tax rate?
Income statement:
Tax Expense / Profit before tax
Where could you find taxes on the financial statements?
Tax expense on income statement
Deferred taxes on balance sheet
Cash taxes paid on cash flow statement
If you make an add-back, how would you calculate net income, taking the additional tax that you would pay?
Multiply additional earnings by the marginal tax rate to see the additional tax that you would pay on those earnings
How do you calculate EPS?
Net Income / No. of shares
Difference between diluted EPS and basic EPS?
How you calculate the no. of shares
How to calculate diluted number of shares?
Uses basic shares plus accounts for financial instruments that COULD be converted into shares
What financial instruments could be converted into shares?
Share options,
Warrants,
Convertible bonds,
RSUs,
Convertible preference shares
