In
accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's
profit that includes all incomes and expenses (operating and
non-operating) except
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
expenses and
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
expenses.
Operating income and operating profit are sometimes used as a
synonym for EBIT when a firm does not have
non-operating income
Non-operating income, in accounting and finance, is gains or losses from sources not related to the typical activities of the business or organization. Non-operating income can include gains or losses from investments, property or asset sal ...
and non-operating expenses.
Formula
*EBIT = (net income) + interest + taxes =
EBITDA – (depreciation and amortization expenses)
*operating income = (
gross income) –
OPEX = EBIT – (non-operating profit) + (non-operating expenses)
where
*EBITDA = earnings before interest, taxes, depreciation, and amortization
*OPEX = operating expense
Overview
A professional investor contemplating a change to the
capital structure of a firm (e.g., through a
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (
EBITDA) and EBIT), and then determines the optimal use of debt versus equity (equity value).
To calculate EBIT, expenses (e.g. the
cost of goods sold
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
, selling and administrative expenses) are subtracted from revenues.
is later obtained by subtracting interest and taxes from the result.
Earnings before taxes
Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for
taxes
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
. EBT excludes the money paid for
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).
See also
*
Earnings before interest, taxes, and amortization (EBITA)
*
Earnings before interest, taxes, and depreciation (EBITD)
*
Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, sta ...
(EBITDAR)
*
Earnings before interest, taxes, depreciation, and amortization
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, sta ...
(EBITDA)
*
EV/EBITDA
*
Operating income before depreciation and amortization (OIBDA)
References
{{Reflist
Fundamental analysis
Profit