What Is Earnings Before Tax (EBT)?

Earnings before tax (EBT) is a measure of financial performance. It reveals a company's earnings before taxes are deducted, is calculated by subtracting all expenses excluding taxes from revenue, and appears as a line item in the income statement.

EBT is sometimes also called pre-tax income, profit before tax, or income before income taxes.

Understanding Earnings Before Tax (EBT)

EBT is the money retained internally by a company before deducting tax expenses. It is an accounting measure of a company's operating and non-operating profits. 

All companies calculate EBT in the same manner and it is a "pure ratio," meaning it uses numbers found exclusively in the income statement. Analysts and accountants derive EBT through that specific financial statement, deducting the cost of goods sold (COGS), interest, depreciation, general and administrative expenses, and other operating expenses from gross sales.

Example of Earnings Before Tax (EBT)

If a company sells 30 widgets for $1,000 a piece during January, its revenue for the period is $30,000. The company then assesses its COGs and subtracts that number from the $30,000 revenue. If it costs the company $100 to produce a single widget, its COGS for January is $3,000. This means that its gross revenue is $27,000 ($30,000 - $3,000 = $27,000).

After a company determines its gross revenue, it tallies all its operating costs together and subtracts that figure from the gross. The operating costs of a company may include any expenses related to its daily activities, such as salary and wages, rent, and other overhead expenses.

If the company is a technology company with substantial investments in human capital, it might have salaries of $10,000 a month and monthly rent of $1,000. Subtract that $11,000 in total overhead from its gross revenue as well as $1,000 of interest expenses, and you're left with EBT of $15,000.

Earnings Before Tax (EBT) as a Tool for Comparison

EBT is crucial because it removes the effects of taxes when comparing businesses. For example, while U.S.-based corporations face the same tax rates at the federal level, they may face different tax rates at the state level.

Since companies may pay different tax rates in different states, EBT allows investors to compare the profitability of similar companies in various tax jurisdictions. Further, EBT is used to calculate performance metrics, such as pretax profit margin.

The Bottom Line

EBT is a useful way to compare the profitability of similar companies operating in different tax jurisdictions. Tax rates do not reflect performance and can vary considerably across borders, making EBT a more effective metric than net income when seeking to gauge a company’s ability to generate earnings from its operations relative to its peers.