What is EBIT
EBIT is the earnings before interest and taxes. The EBIT measures the company’s profit that includes all incomes and expenses but excludes interest and taxes. The higher EBIT the more profit that the company left after the cost of sales (COGS) and the operating expenses, and vice versa.
The EBIT is useful when the investors, stakeholders, or managers analyze the company’s ability by focusing on the operating activities to generate income by ignoring the costs of the capital structure and tax.
In other words, analyzing the EBIT means ignoring interest expenses. This means that a company with lots of debt will have a high-interest expense which inflates the company’s earnings, but won’t help them in terms of cash flow due to the interest payment obligations.
The earnings before interest and taxes (EBIT) is also known as the operating income, operating profit, and operating earnings.
EBIT Formula & Calculation
EBIT can be calculated by several methods but the most common earnings before interest and taxes are calculated by the following EBIT formula:
- EBIT = Revenue – COGS – Operating Expenses
or
- EBIT = Net Income + Interest + Taxes
or
- EBIT = EBITDA – Depreciation and Amortization
where:
- Revenue includes the operating income (gross profit) and non-operating income.
- COGS is the Cost of goods sold (also known as a Cost of sales)
For example, let’s say the Feriors company limited has the following financial results last year:
- Net Income: $2,000,000
- Interest Expense: $20,000
- Taxes: $100,000
The Feriors company limited EBITDA will be: EBITDA = 2,000,000 + 20,000 + 100,000 = $2,120,000
Frequently Asked Questions
BIT is the earnings before interest and taxes. The EBIT measures the company’s profit that includes all incomes and expenses but excludes interest and taxes.
EBIT = Revenue – COGS – Operating Expenses
A higher EBIT is a good EBIT value. The higher EBIT the more profit that the company left after the cost of sales (COGS) and the operating expenses, and vice versa.
