What does EBITDA add to the EBIT calculation?

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, expands upon the EBIT (Earnings Before Interest and Taxes) calculation by adding back two specific non-cash expenses: depreciation and amortization.

Essentially, EBIT reflects a company's operational performance by measuring its earnings generated from core business operations, excluding the effects of its capital structure (interest) and tax environment. However, it may not provide a complete picture of a company's cash flow because it does not account for the expenses related to the wear and tear of capital assets and other intangible assets that are recognized through depreciation and amortization.

Including these items in the EBITDA calculation allows analysts and stakeholders to assess a company's profitability by concentrating on its operational performance while disregarding non-cash expenses that can distort the financial picture. By doing so, EBITDA provides valuable insights into a company’s efficiency and cash generation capabilities, which can be crucial for comparisons across businesses, especially in capital-intensive industries.

In contrast, the other choices pertain to different elements of financial accounting that do not specifically relate to the addition made in transitioning from EBIT to EBITDA. Interest expenses and taxes are already excluded from both EBIT and EBITDA, and net income represents the bottom line after all expenses