Finance:Earnings before interest and taxes
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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 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.
| 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
- ↑ 1.0 1.1 Bodie, Zvi; Kane, Alex; Marcus, Alan (2005). Essentials of Investments. McGraw Hill. p. 452. ISBN 9780072510775. https://archive.org/details/isbn_9780072503678.
- ↑ "Earnings before interest and, taxes (EBIT)". NASDAQ. https://www.nasdaq.com/glossary/e/earnings-before-interest-and-taxes.
- ↑ 3.0 3.1 Murphy, Chris B. (2019-07-11). "How are EBIT and operating income different?". Investopedia. https://www.investopedia.com/ask/answers/012015/what-difference-between-ebit-and-operating-income.asp.
- ↑ "What is EBIT? definition and meaning". http://www.investorwords.com/1631/EBIT.html.
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