68 Pages Posted: 17 Jul 2017 Last revised: 10 Jan 2018

Doron Nissim

Columbia University - Columbia Business School

Date Written: December 31, 2017


Over the last thirty years there has been a strong positive trend in the magnitude of amortization charges, due to both economic and accounting changes. This trend has accelerated in recent years, following the implementation of a revised accounting standard for business combinations. Concurrent with the recent trend, companies and external users of financial statements increasingly discuss operating performance focusing on earnings metrics that exclude amortization but include depreciation. This study compares earnings before interest, taxes and amortization (EBITA) with its two more common alternatives—EBIT and EBITDA—in terms of their ability to explain market valuations and predict stock returns. Over the sample period (1987-2016), EBITDA performed better than EBITA, which in turn performed better than EBIT, both in explaining stock prices and predicting stock returns. However, EBITDA’s dominance over EBITA in explaining valuations has been declining over time, while the performance difference between EBITA and EBIT has been increasing. The improvement in the relative accuracy of EBITA based valuations has been particularly large since the financial crisis and for companies from high amortization intensity industries. Still, EBITDA continues to dominate EBITA and EBIT, consistent with its common use in price multiple valuation. In terms of ability to predict stock returns, it appears that a structural change has occurred after the financial crisis, as the three operating income measures have failed to consistently predict stock returns over the last seven years.

Keywords: EBITDA, EBITA, EBIT, valuation, price multiples, non-GAAP earnings, proforma earnings, earnings management, earnings quality, operating income, depreciation, amortization

JEL Classification: G12, G14, G30, M41

Suggested Citation

Nissim, Doron, EBITDA, EBITA, or EBIT? (December 31, 2017). Columbia Business School Research Paper No. 17-71. Available at SSRN: https://ssrn.com/abstract=2999675 or http://dx.doi.org/10.2139/ssrn.2999675

Doron Nissim (Contact Author)

Columbia University - Columbia Business School ( email )

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