Earnings before taxes
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In
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
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) Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market production process (business). Profit is a measure of profi ...
that includes all incomes and expenses (operating and non-operating) except
interest In finance and economics, interest is payment from a debtor, 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 ...
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 A synonym is a word, morpheme, or phrase In syntax and grammar, a phrase is a group of words or singular word acting as a grammatical unit. For instance, the English language, English expression "the very happy squirrel" is a noun phrase whi ...
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 Financial_capital, capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is ...
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 (finance), leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as col ...
) 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 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.
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 ...
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 government A government is the system or group of people governing an organized community, generally ...
. EBT excludes the money paid for
interest In finance and economics, interest is payment from a debtor, 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 ...
. 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 (EBITDAR) *
Earnings before interest, taxes, depreciation, and amortization A company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve spec ...
(EBITDA) * EV/EBITDA * Operating income before depreciation and amortization (OIBDA)


References

{{Reflist Fundamental analysis Profit