What Is Earnings Before Interest and Taxes (EBIT)?
Earnings before interest and taxes (EBIT) indicate a company's profitability. EBIT is calculated as revenue minus expenses excluding tax and interest. EBIT is also called operating earnings, operating profit, and profit before interest and taxes.
Key Takeaways
- Earnings before interest and taxes (EBIT) measures a company's net income before income tax and interest expenses are deducted.
- EBIT is used to analyze the performance of a company's core operations.
- EBIT is also known as operating income.
- EBITDA equals earnings before interest, taxes, depreciation, and amortization when calculating profitability.
Understanding Earnings Before Interest and Taxes (EBIT)
EBIT, or operating profit, measures the profit generated by a company's operations. By ignoring taxes and interest expenses, EBIT identifies a company's ability to generate enough earnings to be profitable, pay down debt, and fund ongoing operations.
EBIT is not a GAAP metric and not labeled on financial statements but may be reported as operating profits in a company's income statement. Operating expenses, including the cost of goods sold, are subtracted from total revenue or sales. A company may include non-operating income, such as income from investments.
A company may include interest income in EBIT depending on its sector. If the company extends credit to its customers as an integral part of its business, this interest income is a component of operating income. If interest income is derived from bond investments, it may be excluded.
Formula and Calculation
EBIT = Revenue − COGS − Operating ExpensesOrEBIT = Net Income + Interest + Taxeswhere:COGS = Cost of goods sold
The EBIT calculation combines a company's manufacturing cost, including raw materials, and total operating expenses, including employee wages. These items are subtracted from revenue:
- Take the value for revenue or sales from the top of the income statement.
- Subtract the cost of goods sold from revenue or sales, which gives you gross profit.
- Subtract the operating expenses from the gross profit figure to achieve EBIT.
- EBIT=NS-COGS-SG&A+NOI+II
- EBIT=$65,299-$32,909-$18,949+$325+$182
- EBIT=$13,948
- NS=Net Sales
- SG&A=Selling, general, and administrative expenses
- NOI=Non-Operating Income
- II=Interest Income
- EBIT=NE-NEDO+IT+IE
- EBIT=$10,604-$577+$3,342+$579
- EBIT=$13,948
- NE=Net Earnings
- NEDO=Net Earnings from discontinued operations
- IT=Income Taxes
- IE=Interest Expense
What EBIT Tells Investors
EBIT is useful in comparing the performances of similar companies in the same industry. EBIT is not a good measure across different sectors. For example, manufacturing companies have larger COGS than service-only companies. Companies in capital-intensive industries with significant fixed assets on their balance sheets are typically financed by debt with interest expenses.
Investors use EBIT to speculate how a business runs without taxes or capital structure costs. EBIT also levels the playing field when investors compare multiple companies with different tax rates.EBIT vs. EBITDA
EBIT is a company's operating profit without interest expense and taxes. EBITDA or earnings before interest, taxes, depreciation, and amortization uses EBIT without depreciation and amortization expenses when calculating profitability. EBITDA also excludes taxes and interest expenses on debt. But, there are differences between EBIT and EBITDA.
Companies with a significant amount of fixed assets can depreciate the expense of purchasing those assets over their useful life. Depreciation allows a company to spread the cost of an asset over the life of the asset and reduces profitability. For a company with a significant amount of fixed assets, depreciation impacts net income. EBITDA measures a company's profits by removing depreciation and reveals the profitability of a company's operational performance.EBIT | EBITDA |
Excludes Interest and Taxes | Excludes Interest, Taxes, Depreciation, and Amortization |
Reported by companies with good operating profits | Used by companies with large investments in fixed assets and debt |
Measures business profit, comparable to operating income | Measures business profit, comparable to operating income |
Balance Sheet Example of EBIT
Net sales | 65,299 |
Cost of products sold | 32,909 |
Gross profit | 32,390 |
Selling, general, and administrative expense | 18,949 |
Operating income | 13,441 |
Interest expense | 579 |
Interest income | 182 |
Other non-operating income, net | 325 |
Earnings from continuing operations before income taxes | 13,369 |
Income taxes on continuing operations | 3,342 |
Net earnings (loss) from discontinued operations | 577 |
Net earnings | 10,604 |
Less: net earnings attributable to noncontrolling interests | 96 |
Net earnings attributable to Company X | 10,508 |
A company can exclude one-time expenses. In this case, the company was continuing to operate in the country through subsidiaries. Due to capital controls in effect at the time, Company X took a one-time hit to remove foreign assets and liabilities from its balance sheet.
There is also an argument for excluding interest income and other non-operating income from the equation. For some companies, the amount of interest income they report might be negligible and can be omitted. Other companies, such as banks, generate a substantial amount of interest income from the investments they hold in bonds or debt instruments.A second way to calculate Company X's EBIT is to work from the bottom up, beginning with net earnings. We ignore non-controlling interests, as we are only concerned with the company's operations and subtract net earnings from discontinued operations for the same reason. We then add income taxes and interest expenses back in to obtain the same EBIT we did through the top-down method:
Why Is EBIT Important?
What Are the Limitations of EBIT?
How Is EBIT Calculated?
What Is the Difference Between EBIT and EBITDA?
How Do Analysts and Investors Use EBIT?
EBIT is used in several financial ratios in fundamental analysis. The interest coverage ratio divides EBIT by interest expense, and the EBIT/EV multiple compares a firm's earnings to its enterprise value.
The Bottom Line
Earnings before interest and taxes (EBIT) help measure a company's profitability and is calculated as revenue minus expenses excluding tax and interest. EBIT is also called operating profit. EBIT helps investors compare the performances of similar companies in the same industry, but it is not a good measure across different industries.