The EBIT margin is a financial ratio that measures the profitability of a company calculated without taking into account the effect of interest and taxes. It is calculated by dividing EBIT (earnings before interest and taxes) by sales or net income.
EBIT margin is also known as operating margin. It is characterized by reflecting the benefit generated by the economic activity of a company alone. It ignores the way in which it is financed and the intervention of the state or national policy.
EBIT margin formula
The formula for ebit margin calculation is as follows:
EBIT margin = EBIT (Net profit + Tax + Interest) / Net income
How to calculate EBIT margin
We can calculate the EBIT margin by the information provided below:
|Details||Amount in USD|
|Revenue or Sales||100|
|Cost of goods sold||60|
|Depreciation and Amortization||5|
First, we calculate the EBIT by subtracting the income minus all the expenses of the list, except for the financial and taxes. Neither do we consider financial income.
Then we divide the result by sales.
EBIT margin = (100-60-20-5) / 100 = 0.15
So, EBIT margin is 0.15 or 15%
How EBIT Margin can help you
The EBIT margin is an analyzing tool that allows you to compare effectively among the businesses that do not operate in the same place or ecosystem. The result is not distorted by the difference between the tax frameworks of places where they operate.
For example, suppose an investor wants to put his money in a business. He has a few alternatives to consider. Your job is to find the most profitable one.
After a rigorous evaluation process, you are left with two options that come from different countries. In addition, both companies have a similar level of debt and the profit margin of two companies in relation to net profit is the same.
Then, the most profitable proposal, leaving aside the effect of taxes, is the one with the highest EBIT margin.