Earnings Before Interest and Taxes (EBIT)

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Marcus Tan

Earnings Before Interest and Taxes (EBIT) is a company's earnings before it pays taxes or makes interest payments on its debt.

EBIT = Operating Revenue – Operating Expenses + Non-operating Income OR

If the company does not have non-operating income, it can be inferred that EBIT is Operating Income

Operating Income = Operating Revenue – Operating Expenses

EBIT measures a company's earnings ability. Interest and Taxes depend a lot on a company's capital structure - management's decision whether to fund the business with debt or equity. Because companies can change their capital structure without too much difficulty, metrics which are not "capital structure neutral" -- ie, which are impacted by capital structure -- make it difficult to compare one company to another, as different companies may have different mixes of debt and equity. Because it excludes Interest and Taxes, EBIT is "capital structure neutral" and is therefore a more appropriate way of comparing the earnings of different companies than net income is.

EBIT measures a company's earning power from ongoing operations and it largely used by investor because it excludes the effects of different capital structures and tax rates used in different companies. By excluding both interest and income tax expenses, the metric measures the company's ability to profit and as a result makes it easier for investors to compare companies.

EBIT is also (but less commonly) known as Profit Before Interest and Taxes (PBIT).

A variation on EBIT is EBITDA - or Earnings Before Interest, Taxes, Depreciation and Amortization, which is similar to EBIT but also excludes depreciation in a company's assets and any capital expenditures which is is amortizing.

Example

See also

• Capital structure
• EBITDA