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Inaccounting and finance,earnings before interest and taxes (EBIT) is a measure of a firm'sprofit that includes all incomes and expenses (operating andnon-operating) exceptinterest expenses andincome tax expenses.[1][2]
Operating income andoperating profit are sometimes used as asynonym for EBIT when a firm does not havenon-operating income and non-operating expenses.[3]
where
A professional investor contemplating a change to thecapital structure of a firm (e.g., through aleveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (EBITDA) and EBIT), and then determines the optimal use of debt versus equity (equity value).
To calculate EBIT, expenses (e.g. thecost of goods sold, selling and administrative expenses) are subtracted from revenues.[4]Net income is later obtained by subtracting interest and taxes from the result.
| Revenue | |
|---|---|
| Sales revenue | $20,438 |
| Cost of goods sold | $7,943 |
| Gross profit | $12,495 |
| Operating expenses | |
| Selling, general and administrative expenses | $8,172 |
| Depreciation andamortization | $960 |
| Other expenses | $138 |
| Total operating expenses | $9,270 |
| Operating profit | $3,225 |
| Non-operating income | $130 |
| Earnings before interest and taxes (EBIT) | $3,355 |
| Financial income | $45 |
| Income before interest expense (IBIE) | $3,400 |
| Financial expense | $190 |
| Earnings before income taxes (EBT) | $3,210 |
| Income taxes | $1,027 |
| Net income | $2,183 |
Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid fortaxes. EBT excludes the money paid forinterest. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).