EBIT stands for earnings before interest and taxes. EBIT is a measure of profitability that calculates a company’s net income before taxes and interest are deducted. It’s commonly pronounced EE-bit.
How is EBIT calculated?
To calculate EBIT, simply subtract your expenses from your revenue. Expenses include everything from raw materials (Direct costs, also known as cost of goods sold, or COGS), to employee salaries, to administrative costs. The EBIT formula is a simple calculation, but with some big implications:
EBIT = Revenue − Direct Costs − Operating Expenses
You can also calculate EBIT this way:
EBIT = Net Income + Interest + Taxes
Why is EBIT important?
EBIT is helpful for business owners and investors because it provides a simple, accurate snapshot of a company’s profitability, without taking into account taxes and interest. Simply put, it’s a straightforward way to see if the business is viable in the real world, as taxes don’t really have a bearing on your profitability. By calculating earnings without interest and taxes, businesses can focus on what the demand is for their product, and how efficiently they’re able to deliver that product. For investors, EBIT can indicate whether a business would be able to pay off debts.
Is EBIT operating income?
EBIT is often referred to as operating income (or operating profit), as both EBIT and operating income exclude interest expenses and taxes. However, there can be cases where operating income is different from EBIT. For example, if you generated revenue from outside of your normal typical stream of income – such as selling off part of your business – this would be counted under EBIT, but not operating profit.
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