What does EBIT Mean & How does it Work?

EBIT Definition

EBIT (also known as Operating Profit), is short for Earnings Before Interest and Taxes, measures the earnings of 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 revenues and operating expenses.

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 (Earnings Before Interest and Taxes) represents the operating income that was generated by a business, while EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) represents the cash flow generated by the operations of a business.

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 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