Profit before interest and taxes ( PBIT )

Investment Formula Description

Profit before interest and taxes ( PBIT ) or operating income is a investment formula to measure of a corporation's profitability by subtracting operating expenses from revenue excluding tax and interest.

Sometimes, profit before interest and taxes ( PBIT ) is also referred as operating income, operating profit or even operating earnings. Normally, investors will see profit before interest and taxes ( PBIT ) in income statement.

Some investors might confuse earnings before interest and taxes  ( PBIT ) with gross profit. There is significant difference between profit before interest and taxes ( PBIT ) with gross profit. For gross profit , revenue was deducted with cost of goods sold ( COGS ) only to obtain the gross profit, while for profit before interest and taxes ( PBIT ), revenue was deducted with operating expenses ( OPEX ) excluding interest and taxes. 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, profit before interest and taxes ( PBIT ) 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 profit before interest and taxes ( PBIT ).

Another more common name for profit before interest and taxes ( PBIT ) is earnings before interest and taxes ( EBIT ). The reason that earnings before interest and taxes ( EBIT ) is also known as profit before interest and taxes ( PBIT ) is because investors can obtain profit before interest and taxes ( PBIT ) from net income or net profit by adding back interest and taxes.

 

Investment Formula

Profit before interest and taxes ( EBIT ) or operating income = Net profit + Interest + Taxes

Investment Formula Example

Corporation A has $80,000 net profit for this financial year and it need to pay $12,000 taxes to the government and $36,000 interest to bank. The profit before interest and taxes ( PBIT ) calculation is as following.

Profit before interest and taxes ( PBIT ) or operating income = Net profit + Interest + Taxes = 80,000 + 36,000 + 12,000 = $128,000

The profit before interest and taxes ( PBIT ) of corporation A for this financial year is $128,000.