Earnings before interest and taxes ( EBIT )

Investment Formula Description

Earnings before interest and taxes ( EBIT ) or operating income is a investment formula to measure of a corporation's profitability excluding interest and income tax expenses. 

Earnings before interest and taxes ( EBIT ) is an indicator of corporation's profitability, which is calculated as revenue minus operating expenses, excluding tax and interest. Sometimes, earnings before interest and taxes ( EBIT ) is also referred as operating income, operating profit or even operating earnings. Normally, investors will see earnings before interest and taxes ( EBIT ) in income statement.

Some investors might confuse earnings before interest and taxes  ( EBIT ) with gross profit or gross income. There is significant difference between earnings before interest and taxes ( EBIT ) with gross profit or gross income. For gross profit or gross income, revenue was deducted with cost of goods sold ( COGS ) only to obtain the gross profit, while for earnings before interest and taxes, revenue was deducted with operating expenses ( OPEX ). Note that cost of goods sold is only part of operating expenses ( OPEX ). Operating expenses have more than cost of goods sold ( COGS ) such as administrative expenses, depreciation, amortization  and other expenses.

For companies with minimal depreciation and amortization activities, earnings before interest and taxes ( EBIT ) is monitored closely by the creditors since it represents the amount of cash that the companies can earn to pay off creditors. For companies with high depreciation and amortization activities, earnings before interest, taxes, depreciation and amortization ( EBITDA ) is used rather than earnings before interest and taxes ( EBIT ).

Besides, investors can obtain earnings before interest and taxes ( EBIT ) from net income or net profit by adding back interest and taxes. Hence, earnings before interest and taxes ( EBIT ) sometimes is referred as profit before interest and taxes ( PBIT ).

 

Investment Formula

Earnings before interest and taxes ( EBIT ) or operating income = Revenue - Operating Expenses ( OPEX )

Investment Formula Example

Corporation A has $100,000 revenue  for this financial year with $50,000 cost of goods sold ( COGS ), $10,000 administrative expenses, $20,000 depreciation and amortization and $500 other expenses. The earnings before interest and taxes  ( EBIT ) calculation is as following.

Earnings before interest and taxes ( EBIT ) or operating income = Revenue - Operating Expenses ( OPEX ) = 100,000 - ( 50,000 + 10,000 + 20,000 + 500 ) = $15,000

The earnings before interest and taxes ( EBIT ) of corporation A for this financial year is $15,000.