What is Earnings before Interest and Taxes (EBIT)?
Earnings before interest and taxes (EBIT) is a financial metric that measures a company’s operational profitability.
EBIT is calculated by subtracting a company’s expenses excluding interest and taxes from its total sales or revenues.
EBIT gives a significant indication of a company’s operating profitability. Because EBIT is independent of the type of financing (equity and debt ratio) and tax liabilities.
Why is EBIT important
EBIT measures how much a company generates profit from its operations by ignoring interest expenses and tax on profit.
It solely concentrates on the company’s ability whether it can generate enough profit after meeting its cost of goods sold and operating expenses to pay its debt and can finance its ongoing operating activities.
EBIT is one of the metrics for measuring profitability. The EBIT or EBIT margin is often used as a benchmark for cross-company comparisons.
It also serves as a tool for comparison of companies in a group or same business nature but funded to a varying degree and subject to operating in different tax zones or different countries.
EBIT is also considered as Operating income or Profit before interest and taxes. However, there are scenarios when EBIT and Operation income may differ.
EBIT is typically reported in the income statement.
To calculate EBIT, we should know the company’s Revenue or Sales, Cost of goods sold and Operating expenses.
EBIT = Revenue – Cost of Goods Sold – Operating expenses
EBIT = Net Income + Interest expense + Income taxes