Here we have the income statement of a company and we want to focus on operating profit; a good measure of a company's performance Well why is this the case? Imagine I'm looking at the income statement of Apple and even more so I'm thinking about buying the company Apple I want to focus on how profitable their products are. So their products would be: iPhones, Macs, tablets, watches, those kind of things The performance of those sales are going to be captured in the sales, cost of goods sold and selling, general and admin lines. Summed up by operating profit I don't care about the interest or finance expense associated with Apple When I buy the company I'll pay off their debt, I don't really care about that I also don't care about the tax expense; unavoidable, it just has to happen I really care about the performance of selling those core products and Apple's ability to control its costs in making those products Operating profit is thus a key line item for me We can also say that operating profit is your profit before financing and government costs Now that sounds an awful lot like EBIT (Earnings, before Interest and Tax) So could we say that EBIT equals operating profit? Well in some cases yes but we will often find a difference Let's start with operating profit, I might find that we've got to that operating profit after taking off some very particular expenses We may have incurred some non-recurring expenses Maybe we had some litigation that happened just this year and thus it's gone into and affected this years operating profit Maybe we've had some non core expenses? Maybe Apple sold a subsidiary and incurred some expenses or losses due to that Is that what Apple does? Buys and sells subsidiaries? No, Apple makes gadgets. I want to know the performance of selling those gadgets, not the performance of buying and selling subsidiaries And lastly we have had some expenses from non-controlled holdings Maybe Apples got a 25% holding in a company Do they control that? Is that really what Apple does? No, they don't control that business, I want to ignore that I want to focus on its core business So if I take its current operating profit and add back the non-recurring expenses, add back the non-core expenses, add back the non-controlling expenses We get to EBIT Now just for definition, EBIT is Earnings before interest and tax And a very similar measure is EBITDA (Earnings before interest, tax, depreciation and amortization) Why is it sometimes important for many people to add back the depreciation and amortization? Well imagine we're comparing two identical companies They sell the same products, have the same sales and broadly speaking have the same costs However the depreciation on their vehicles is different They have a different policy, one company depreciates over 10 years, the other company depreciates over 20 years These companies are thus going to have different operating profits, purely because of this difference in accounting policy I don't care about the differences in accounting policies, so I'm going to add back the depreciation and I've now got a much more comparable measure of these two companies. What I'll find is that they've got identical EBITDAs So cleaned EBIT or cleaned EBITDA; adding back those non-recurring, non-core and non-controlling items They are key measures of performance for a number of different businesses