Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.[1][2]

Operating income and operating profit are sometimes used as a synonym for EBIT when a firm does not have non-operating income and non-operating expenses.[3]

Formula

EBIT = Net income + Interest + Taxes = EBITDA – Depreciation and Amortization expenses
Operating income = operating revenue – operating expenses (OPEX) = EBIT – non-operating profit + non-operating expenses[3]

Overview

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (EBITDA) and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[4] Net income is later obtained by subtracting interest and taxes from the result.

Example statement of income (figures in thousands)[5]
Revenue
     Sales revenue $20,438
     Cost of goods sold $7,943
Gross profit $12,495
Operating expenses
     Selling, general and administrative expenses $8,172
     Depreciation and amortization $960
     Other expenses $138
     Total operating expenses $9,270
Operating profit $3,225
     Non-operating income $130
Earnings before Interest and taxes (EBIT) $3,355
     Financial income $45
Income before interest expense (IBIE) $3,400
     Financial expense $190
Earnings before income taxes (EBT) $3,210
     Income taxes $1,027
Net income $2,183

Earnings before taxes

Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for taxes. EBT includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).

See also

References

  1. ↑ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
  2. ↑ "Earnings before interest and, taxes (EBIT) definition".
  3. 1 2 "How are EBIT and operating income different?".
  4. ↑ http://www.investorwords.com/1631/EBIT.html EBIT definition
  5. ↑ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.
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