Investors want to know how much profit a company makes – the bottom line, so to speak. Calculating earnings before interest and taxes allows you to dig a bit deeper. EBIT looks at a firm's profit from its business operations while ignoring certain non-operating costs.
EBIT and the Income Statement
EBIT states operating profit with financing costs and income taxes excluded. This helps you get a clearer picture of how much profit a firm actually makes from its business operations, especially if you compare the EBIT of a company with other businesses in the same industry. Firms have different debt structures and costs, and may operate under varying tax laws. By factoring out these variables, you can see how efficient a firm is relative to its competitors. All the data you need to calculate EBIT appears on the income statement, which publicly-held companies publish in their annual reports and SEC filings.
Sample Income Statement
Net income 170,000
Video of the Day
The presentation of information on income statements can vary slighlty depending upon the industry, end user and other factors. For example, you might see EBIT stated as a line on an income statement with interest and taxes listed later. In the example cited above, interest is listed above earnings before taxes and income taxes, so a calculation is required. When interest is subtracted before the line labeled operating income or operating profit, simply add the amount of interest expenses back to the operating income to find EBIT. In this example, add $50,000 to $170,000 for an EBIT of $220,000
Variations on EBIT
Sometimes a company chooses to list earnings before taxes instead of EBIT, as in this example. Another variation you can calculate is EBITDA or earnings before interest, taxes, depreciation and amortization. Depreciation and amortization are allowances that indicate how much a company's assets have been used up over time. You can think of depreciation and amortization as indicators of how much a firm needs to spend to replace assets when required. The calculation method is the same as for EBIT. Add any of the excluded items to the amount on the operating income line of the income statement to arrive at EBITDA.