What Is Earnings Before Interest and Taxes – EBIT?
Earnings before interest and taxes is an indicator of a company’s profitability.
One can calculate it as revenue minus expenses, excluding tax and interest.
EBIT is calculated by taking a company’s cost of manufacturing including raw materials, as well as the company’s total OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll.
Calculation is pretty straight forward
Take 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 (earnings before interest and taxes) is a company’s net income before income tax expense and interest expenses have been deducted.
• EBIT is used to analyze the performance of a company’s core operations without the costs of the capital structure and tax expenses impacting profit.
• EBIT is also known as operating income since they both exclude interest expenses and taxes from their calculations.
EBIT vs. EBITDA
EBIT is a company’s operating profit without interest expense and taxes. However, EBITDA or (earnings before interest, taxes, depreciation, and amortization) takes EBIT and strips out depreciation and amortization expenses when calculating profitability. Like EBIT, EBITDA also excludes taxes and interest expenses on debt.
For companies with a significant amount of fixed assets, they can depreciate the expense of purchasing those assets over their useful life. In other words, depreciation allows a company to spread the cost of an asset out over many years or the life of the asset. Depreciation saves a company from recording the cost of the asset in the year the asset was purchased. As a result, depreciation expense reduces profitability.
Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life expectancy.
Amortization is an accounting technique used to periodically lower the book value of
a loan or an intangible asset over a set period of time.