Also referred to as profit before interest and taxes, operating profit, and operating earnings, Earnings Before Interest and Taxes (EBIT) is an indicator of the profitability in a company.
EBIT metric can easily be calculated by deducting revenue from expenses (excluding interest and tax).
EBIT = Revenue – Cost of goods sold – Operating expense
EBIT = Net income + Interest + Taxes
Earnings before interest and taxes help to measure the company’s profit generated from operations; thus, it is synonymous to operating profit. By overlooking interest and taxes expense, EBIT concentrates completely on the ability of a company to generate earnings from operations and avoiding variables like Capital structure and tax burden.
This one is a useful metric as it assists in discovering how a company is competent enough to generate income, pay debts and fund current operations.
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Let’s take earnings before interest and taxes example here. Below-mentioned is the income statement of an ABC company for the year that ends on 30th June 2020.
|Net sales||Rs. 65,299|
|Cost of products sold||Rs. 32,909|
|Gross profit||Rs. 32,390|
|Selling, general and maintenance expense||Rs. 18,949|
|Operating income||Rs. 13,441|
|Interest expense||Rs. 579|
|Interest income||Rs. 182|
|Non-operating income||Rs. 325|
|Earnings from operations before income taxes||Rs. 13,369|
|Income taxes on operations||Rs. 3,342|
|Net earnings from discontinued operations||Rs. 577|
|Net earnings||Rs. 10,604|
|Net earnings from non-controlling interest||Rs. 96|
|Net earnings from gamble||Rs. 10,508|
For calculating EBIT, the cost of goods sold and selling, general and maintenance expense get subtracted from the net sales. But, the example mentioned above has other types of income as well that can be inculcated in the EBIT calculation.
There are interest income and non-operating income. Thus, the EBIT will be calculated as:
EBIT = Net sales – Cost of goods sold - Selling, general and maintenance expenses + Non-operating income + Interest income
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