What does EBIT Mean & How does it Work?

EBIT Definition

EBIT (an acronym and also known as Operating Profit), is short for Earnings Before Interest and Taxes, measures the metrics of earnings for a business over a specific period of time, but excludes interest and income tax expenses. Interest and taxes are not included in this calculation because interest and taxes are not expenses that are a result of operations. EBIT is the difference between operating total revenue and operating expenses. According to the accounting principles of GAAP, this can be determined from the company’s financial statements.

EBIT Calculation

The formula for how to calculate EBIT is:

EBIT =Profit + Interest expense + Income tax expense

Where Do You Find EBIT

EBIT is found on a company’s income statement.

What Is The Difference Between EBIT Vs EBITDA?

EBIT and the EBIT formula (Earnings Before Interest and Taxes) represents the operating income that was generated by a business, while EBITDA calculations from the EBITDA formula (Earnings Before Interest, Taxes, Depreciation & Amortization) represents the cash flow statement generated by the operations of a business. A company’s EBITDA is almost always used in valuation ratios. Earnings Before Interest and Taxes multiples will always be higher than Earnings Before Interest, Taxes, Depreciation & Amortization multiples. These figures are crucial to potential investors and analysts who are examining the business operationsfinancial performance and company’s profitability of company A which can be compared with Company B. This is where potential red flags will appear in the company’s operating performance.

What Is The “Interest” In EBIT (Earnings Before Interest And Taxes)?

The “interest” in EBIT, or EBIDTA for that matter, refers to the amount of interest expense or interest payments a business had during the accounting period being reviewed.

Is Net Income And EBIT The Same?

No, net income looks at a businesses revenue minus operating expenses and does not include interest, taxes, capital expenditures, depreciation and amortization expenses while EBIT looks at a business’s profitability minus all expenses except tax and interest.

How Do EBIT And Operating Income Differ?

EBIT is the amount of earnings generated by a company, minus operating expenses and adding back interest and taxes, while operating income, consists of all revenues and expenses from operations operations and does not include non-operating expenses like interest and taxes.

What Are Some Ways To Increase EBIT Without Increasing The Sales?

Three ways that you can increase EBIT while keeping sales level is by:

  • lowering cost of goods sold
  • decreasing operating expenses
  • decreasing depreciation expense