In
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
and finance, earnings before interest and taxes (EBIT) is a measure of a firm's
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory intere ...
that includes all incomes and expenses (operating and
non-operating) except
interest expenses and
income tax expenses.
Operating income and operating profit are sometimes used as a
synonym
A synonym is a word, morpheme, or phrase that means exactly or nearly the same as another word, morpheme, or phrase in a given language. For example, in the English language, the words ''begin'', ''start'', ''commence'', and ''initiate'' are all ...
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 , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...
– (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 , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...
) 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, selling and administrative expenses) are subtracted from revenues.
Net income
In business and 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, interest, a ...
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. EBT excludes the money paid for
interest. 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
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, stat ...
(EBITD)
*
Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR)
*
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
*
EV/EBITDA
*
Operating income before depreciation and amortization (OIBDA)
References
{{Reflist
Fundamental analysis
Profit