Why do some businesses grow while others struggle, even when both are making money? The answer might be in how they measure success. You’ve probably heard of cash flow, but what about EBIT? Cash shows how much money is available right now, while EBIT looks at a business’s actual profitability.
Are you focusing only on the cash coming in, or are you also checking your business’s long-term health with EBIT?
What is Cash?
Cash is physical money, like coins and bills, used to buy things, pay debts, or get services. It also includes assets that can quickly be turned into cash, such as government bonds.
For businesses, cash includes money in bank accounts and easily convertible assets. While we often think of cash as money in hand, it can also mean bank accounts or checks. Despite the rise of digital payments, cash remains widely used, though countries like Sweden now see less than 10% of transactions in cash.
In finance, cash represents a company’s assets that are either immediately available or can be converted to cash within a year. Cash flow, which shows the net amount of cash coming in and going out, is key for investors to assess financial health.
What is EBIT?
EBIT, short for earnings before interest and taxes, is a term investors use to check how well a company is doing financially. It helps compare companies without looking at their debt or how they are funded.
EBIT focuses on three key areas:
1. Earnings: When calculating EBIT, analysts look at the money a company makes from its regular business activities after covering its operating costs. This is called operating income. It’s important because it shows how much money the company has to spend without needing loans or debt.
2. Interest: Interest, which relates to the growth of financial assets, is not included in EBIT. EBIT ignores interest to focus on the money a company makes from its main business activities, without counting any extra money from growing investments.
3. Taxes: Taxes affect how much money a company has left, but they aren’t included in EBIT calculations. By ignoring taxes, EBIT makes it easier to compare different companies fairly, since taxes are something businesses can’t control.
Comparison Between Cash and EBIT
Keeping an eye on cash flow is essential to ensure the business has enough money to keep running smoothly. The following Key Performance Indicators (KPIs) help monitor this:
Cash KPIs:
- Operating Cash Flows (OCF): This measures the cash the business generates from its main activities. It’s important because it shows how much actual cash is coming in or going out from the company’s day-to-day operations.
- Liquidity Ratios: These ratios indicate how well the company can cover its short-term debts. By analyzing both OCF and liquidity ratios, you get a clear idea of how strong the company’s financial position is and whether it can meet its immediate financial needs.
EBIT KPIs:
- EBIT (Earnings Before Interest and Taxes): This shows the company’s profit from its core operations, excluding interest and taxes. It helps understand how efficiently the business is running, focusing solely on its regular activities.
- Operating Margin: This is the percentage of revenue that becomes profit before interest and taxes are considered. It’s a key measure of how efficiently the company turns sales into earnings.
- EBIT Growth Rate: This tells you how much the company’s earnings, before interest and taxes, have grown over a certain period. It reflects how well the company is increasing its income from operations.
A strong EBIT shows that the company can comfortably take on new debt or make investments, as it has solid earnings to back these decisions. At the same time, having enough cash provides a safety net during difficult times, showing the company’s ability to stay afloat without relying on borrowed money.
Cash vs EBIT
Cash and EBIT are two key numbers that businesses use to measure their financial health.
Although they may seem similar, they have important differences. Cash shows how much money a business actually has on hand, while EBIT (Earnings Before Interest and Taxes) gives a picture of a company’s profitability before paying interest and taxes.
By looking at both, businesses can make smart decisions. For example, a company might have strong EBIT but low cash flow, which can lead to issues paying bills in the short term. Understanding these differences helps businesses plan better for the future and aim for long-term growth.
Cash Runs the Day, EBIT Builds the Future
Cash and EBIT are important for different reasons, and finding the right balance between the two is key to financial stability and success.
Some may argue that cash is the most important factor for a business—after all, without cash, you can’t cover expenses or keep the operation going. While this is true, focusing only on cash flow can cause you to miss the bigger picture. Cash reflects the present, but EBIT provides a clearer view of long-term profitability. A business might have enough cash today but could still struggle to grow if it’s not profitable in the long run.
So, while cash keeps things moving, don’t overlook EBIT if you want your business to thrive. By understanding both, you’ll be in a stronger position for future success. The tools are in your hands—use them wisely.
FAQs
Is EBIT the same as cash?
No, EBIT (Earnings Before Interest and Taxes) is not the same as cash. EBIT shows the company’s profit from its core business operations, but it doesn’t account for cash expenses like interest, taxes, or changes in working capital. It’s a measure of profit, not the actual cash the business has.
What is the difference between EBIT and cash flow from operations?
EBIT is a measure of a company’s profit from its core operations before interest and taxes are subtracted. Cash flow from operations, on the other hand, shows the actual cash the company is bringing in from its day-to-day activities. Cash flow considers factors like changes in working capital, which EBIT does not.
What is the difference between cash and EBITDA?
Cash is the actual money a company has, while EBITDA measures profitability by focusing on core business operations, excluding interest, taxes, and non-cash items like depreciation.
What is the difference between EBIT and FCF?
EBIT shows profit from core operations before interest and taxes. Free Cash Flow (FCF) represents the actual cash left after covering expenses and investments, available for debt, dividends, or investments.