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 they products are.

So they products would be iPhones, Macs, tablets, watches those kinds 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. It's unavoidable.

It just has to happen.

I really do 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 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 year's 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 may have had some expenses from non-controlled holdings. Maybe Apple's 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 Apple's core business.

So I take its current operating profit and add back the non-recurring expenses add back the non-core expenses.

Add back the non-controlled expenses and we get to EBIT.

Just to note if any of these were income items as opposed to expenses. We would need to deduct them from operating profit to 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 to add back the depreciation and amortization? Well imagine we're comparing two identical companies.

They sell the same products. They have the same sales and broadly speaking, they have the same costs.

However, the depreciation on their vehicles is different. They have a different policy one company depreciates over five years the other company depreciates over 10 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 and what we'll find is that they'll have identical EBITDAs.

So cleaned EBIT or cleaned EBITDA elimiating those non-recurring non-core and non-controlled items are akey measures of performance for a number of different businesses.