With gross profit only operating expenses are One metric is not better than the other and the differences are important to understand in order to use them effectively.

Gross profit is useful in understanding how companies generate profit from the direct costs of producing goods.

EBITDA is useful in analysing and comparing profitability.

Gross profit does appear on a company’s income statement.

EBITDA does not appear on income statements but can be calculated using income statements.

Gross profit shows profitability after subtracting the costs incurred when making a product or providing a service.EBITDA shows profitability before interest payments, tax, depreciation and amortisation.EBITDA and gross profit are business metrics that are used to measure profitability in companies by removing different costs and expenses.This is different to EBITDA, although both show the earnings of the company in question the company profit is calculated in separate ways. Gross profit is useful for businesses, especially those that are concerned with selling a product, as it shows the portion of each pound of revenue that the business retains. Gross profit doesn’t include costs and expenses such as tax and interest. Gross profit considers the cost of goods sold or the expenses related to the selling of the product or service. (Revenue – Cost of Goods Sold) = Gross Profit

Gross profit is the amount of revenue that is profit after production expenses are taken into account. It can also be applied to expensing intangible assets such as trademarks and copyrights in a similar way to depreciation. In business, it usually refers to the repayment plan of capital and interest plans on corporate loans. AmortisationĪmortisation is the gradual writing off of initial costs of an asset or debt. In accounting, however, it can be levered into valuable tax reductions as you account for the cost of the item over multiple time periods. Essentially it accounts for the loss of value of an asset over time due to wear, tear and general use. Depreciationĭepreciation is the accounting technique used to calculate the cost of physical assets over their entire lifespan. Whether by a government or other authority, taxes are not necessarily linked to services rendered and can be applied to assets, events, and transactions. One of only two certainties in life, taxes are legally imposed financial duties. Interest rates vary from company to company based on macro-economic climates, past and forecasted financial performance and many more. This can, for example, be on lines of credit, corporate bond issuances and more. Interest expenses are the costs of any borrowed capital. It’s a useful gauge to your company’s profitability. EarningsĮarnings (otherwise known as net earnings or net income) are the value of the company’s sales minus the costs of goods sold (COGS), expenses, taxes, interest and depreciation. The earnings (net income), tax and interest figures are on income statements, while depreciation and amortisation values are found on the cash flow statement (or sometimes in the notes of operating expenses). Calculating EBITDA is an incredibly simple process and the values are easily extracted from a company’s financial statements.

Free cash flow formula from ebitda