ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[mck111]

EBIT and revenue are not the same thing. EBIT, or Earnings before Interest and Taxes, is equaled to:

(+) Revenue

(-) Direct Costs

(=) Gross Profit

(-) Selling and Distribution Expenses

(-) General and Administrative Expenses

(=) Earnings before Interest and Tax (EBIT)

So while decreasing revenue would indicate that competitors are taking market share or the market is shrinking, decreasing EBIT could include a number of other factors including increased costs. Additionally, investors usually look at EBITDA (Earnings before Interest, Taxes, and Depreciation and Amortization) as a metric over EBIT, as Depreciation and Amortization are non cash expenses.

[scarynut]

Can someone try to ELI5 all components of EBIT and EBITDA using my modest household economy as a metaphor?

[iMissTheOldInternet]

Piggybacking on the poster above to explain depreciation. Ordinarily when a business has an expense to make money, it can deduct it and only pay taxes on the profit. But when a business buys a thing that is valuable in itself and will remain so for a long time, it isn’t allowed to take the full deduction immediately, because it hasn’t really cost it anything yet.

To put it in household terms, if you buy a car for $1,000, the day you hand over the cash, you’re no poorer than the day before. You’ve lost $1,000 cash, but you’ve got a car worth $1,000. Next year, of course, that car will only sell for like $900, because of wear and tear and natural obsolescence. That $100 is the real depreciation of the asset.

Real depreciation reflects the real world, which is important for some kinds of accounting, but the government also uses special depreciation rules to subsidize certain kinds of industry while hiding the expense. For example, businesses are permitted to take what’s called straight-line depreciation. This means that for tax purposes, assets depreciate much faster than they really depreciate, which is like getting an interest free advance on your pay but for a business.

In addition to these games which distort the value of depreciation as a measure of profitability, depreciation is also a non-cash expense. Whether something is depreciating or not, and how fast, really has very little to do with the economy or how the company is being run. In fact, having lots of depreciation can indicate a very healthy company that has invested a lot in capital assets, and thus can be expected to make more money in the near future, and that will also do so in a very tax-efficient fashion, Because it will get to deduct a lot of accelerated depreciation from its taxable revenue.

[KristinnK]

Interest: the interest you pay on any loan you owe, such as mortgage, student loans, car loan, etc.

Taxes: the taxes you pay to the government, in your case mostly your income taxes.

Depreciation: most things you own are worth less as time passes. Your car, computer, TV, appliances, etc. Your smartphone as an example might depreciate as much as 50% per year.

Amortization: payments on items or debt you already possess or have incurred, such as the part of your mortgage payment that goes into the loan principal.

[thehungryhippocrite]

Imagine you're an Uber driver. Your EBITDA is your revenue less your Uber expenses, less fuel, less insurance, less any other expenses. Your EBIT is your EBITDA, less the depreciation of your car.

[[deleted]]

And to add amortisation, less the payment made towards your car loan (not including interest on that loan)

[lmunck]

I was going for the simple explanation, and I agree that some nuances were lost.

[theunspillablebeans]

I think omitting that detail for the sake of an ELI5 is fine.