In
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
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 debtor 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 distinct f ...
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 and non-operating expenses.
Formula
*EBIT = (net income) + interest + taxes =
EBITDA
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandat ...
– (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
In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...
of a firm (e.g., through a
leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (
EBITDA
A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandat ...
) 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) (also cost of products sold (COPS), or cost of sales) 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 iden ...
, selling and administrative expenses) are subtracted from revenues.
Net income
In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...
is later obtained by subtracting interest and taxes from the result.
Earnings before 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 (EBITDAR)
*
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
*
EV/EBITDA
Enterprise value/ EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used to determine the fair market value of a company. By contrast to the more widely available P/E ratio (price-earnings ratio) it incl ...
*
Operating income before depreciation and amortization (OIBDA)
References
{{Reflist
Fundamental analysis
Profit