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 expenses and 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 – (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) 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, selling and administrative expenses) are subtracted from revenues. Net income is later obtained by subtracting interest and taxes from the result.
+ Example statement of income (figures in thousands) Revenue Sales revenue $20,438 Cost of goods sold $7,943 Gross profit $12,495 Operating expenses Selling, general and administrative expenses$8,172 Depreciation and amortization$960 Other expenses$138 Total operating expenses $9,270 Operating profit $3,225 Non-operating income$130 Earnings before interest and taxes (EBIT) $3,355 Financial income$45 Income before interest expense (IBIE) $3,400 Financial expense$190 Earnings before income taxes (EBT) $3,210 Income taxes$1,027 Net income $2,183
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 (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)
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