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Fincash » Earnings Before Interest and Taxes

Earnings Before Interest and Taxes

Updated on November 25, 2020 , 51 views

What is Earnings Before Interest and Taxes?

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.

Earnings Before Interest and Taxes

EBIT metric can easily be calculated by deducting revenue from expenses (excluding interest and tax).

EBIT Formula

EBIT = Revenue – Cost of goods sold – Operating expense

Or

EBIT = Net income + Interest + Taxes

Explaining Earnings Before Interest and 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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EBIT Example

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.

Particulars Amount
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

  • EBIT = Rs. 65,299 – Rs. 32,909 – Rs. 18,949 + Rs. 325 + Rs. 182 = Rs. 13,948
Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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