EBITA and EBITDA are both earnings streams, while EPS, which stands for earnings per share, is another level of earnings expressed on a per share basis. EBITA is an acronym for earnings before interest, taxes and amortization, and EBITDA is an acronym for earnings before interest, taxes, depreciation and amortization. EPS is based on net earnings, which can also be referred to as earnings after taxes. Therefore, the primary differences between the three different earnings streams are:
- Earnings used in EPS reflects deductions for interest expense, taxes, depreciation and amortization.
- EBITA is equal to earnings plus interest, taxes and amortization.
- EBITDA is equal to EBITA plus depreciation.
- EPS is equal to net earnings divided by the number of common shares issued and outstanding.
Investors and creditors often assign greater importance to EBITA and EBITDA results than EPS. Adding back depreciation and amortization, both noncash items, results in an earnings measure that is more akin to gross cash flow than net earnings. Depreciation and amortization are expenses for accounting purposes, but do not result in direct cash outflows.
EBITDA, in particular, is favored by investors because it reflects results irrespective of capital structure, measured by interest costs, and fixed capital allocations, as measured by depreciation. Amortization expenses also serve to reduce earnings solely on an accounting basis. Focusing on EBITDA, particularly in industries that employ substantial debt financing and are capital-intensive, allows investors to compare financial results independent of these items.
EBITDA and EPS are key metrics used in valuing companies. The well-known Price to Earnings ratio is calculated by dividing a company's stock price by its EPS. However, in most non-financial industries, investors use EBITDA multiples for valuation purposes. This holds true for both public and private companies. Private companies are valued by applying multiples derived from publicly traded peer companies to the subject company's metrics such as book value and EBITDA. Another market-based valuation method obtains transaction multiples from acquisitions of controlling interests of both public and private companies, and applying these multiples in the same way.
Applying the Price to Earnings ratio, calculated using EPS, results in a market value of equity. Applying EBITA and EBITDA multiples result in enterprise value, from which interest-bearing debt must be subtracted in order to arrive at the market value of equity. This is because EPS reflects an after-debt income stream that is only available to shareholders. EBITA and EBITDA reflect cash flows available to both shareholders and creditors, because deductions for interest expense are not considered within the calculation.