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Earnings Before Interest and Taxes

Earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses except interest expenses and income tax expenses. EBIT is calculated by taking a firm's net income and adding back interest and taxes. It can also be calculated by taking operating income and subtracting non-operating expenses plus non-operating income. EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is similar but excludes depreciation and amortization expenses. Investors use EBIT and EBITDA to evaluate a firm's fundamental earnings potential and determine optimal capital structure.

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222 views3 pages

Earnings Before Interest and Taxes

Earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses except interest expenses and income tax expenses. EBIT is calculated by taking a firm's net income and adding back interest and taxes. It can also be calculated by taking operating income and subtracting non-operating expenses plus non-operating income. EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is similar but excludes depreciation and amortization expenses. Investors use EBIT and EBITDA to evaluate a firm's fundamental earnings potential and determine optimal capital structure.

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Earnings before interest and taxes

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.[1][2]

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.[3]

Formula
EBIT = (net income) + interest + taxes = EBITDA – (depreciation and amortization expenses)
operating income = (gross income) – OPEX = EBIT – (non-operating profit) + (non-operating
expenses)[3]

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.[4] Net income is later obtained by subtracting interest and taxes from the result.
Example statement of income (figures in thousands)[1]
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)

References
1. Bodie, Zvi; Kane, Alex; Marcus, Alan (2004). Essentials of Investments (https://archive.org/de
tails/isbn_9780072503678). McGraw Hill. p. 452 (https://archive.org/details/isbn_978007250
3678/page/452). ISBN 9780072510775.
2. "Earnings before interest and, taxes (EBIT)" (https://www.nasdaq.com/glossary/e/earnings-b
efore-interest-and-taxes). NASDAQ.
3. Murphy, Chris B. (2019-07-11). "How are EBIT and operating income different?" (https://ww
w.investopedia.com/ask/answers/012015/what-difference-between-ebit-and-operating-inco
me.asp). Investopedia.
4. "What is EBIT? definition and meaning" (http://www.investorwords.com/1631/EBIT.html).
investorwords.com. Retrieved 2019-10-03.

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