EBIT and EBITDA. We have typically seen EBIT and EBITDA calculations in evaluation context with the standard definition, driven by the three Cs, earnings that are core, continuing, and controlled. This is much more specific than the accounting version, which is loosely aligned with operating profit. In that context, what we would typically do first, is adjust for any non-recurring or non-continuing items. Then adjust for any non-core items. And lastly, adjust for any non-controlled items. For EBITDA, we would simply add depreciation and amortization. The rating agencies take a different view of EBIT and EBITDA. Your financial institution might have its own definition as well. For EBIT, S&P and Moody's is similar, take accounting profit and then adjusts for non-recurring items. Secondly, it adjusts for any non-core items, and then it adds the equity income, or subtracts if it's inequity loss. And lastly, it adds interest income. Now, EBITDA typically takes EBIT and just adds D&A to it, but not for the rating agencies, it's almost an entirely different calculation. Again, it begins with operating profit, and then D&A, of course, is added back. And then we adjust for the non-reoccurring items. And then we actually add, not the income from the equity or JV investments, but the dividends. And this is done because the dividends are actually paid in cash where the income is actually an accrual. Depending on the size of depreciation and amortization, EBIT can often be bigger than EBITDA. EBITDA also does not include interest income, nor does it include equity income, or any non-core income. Both EBIT and EBITDA however, under the rating agency's definitions, always exclude non-recurring income and expenses. In terms of cleaning the earnings, it's a process that takes time and some experience. This is a handy chart of items to look for. There is no easy way around doing this other than to dig through the financials, through the MD&A, the management discussion and analysis, as well as the notes to the financials, always keeping things in perspective as you go. Analysts should never become auditors, and also keep in mind that most forecasts will not even include things like non-recurring items. D&A is rarely broken out in the income statement, but it is always broken out on the cash flow statement. It still behooves the analyst to check the PP&E notes as the D&A often includes hidden impairments that might need to be cleaned.
