Canva; EBIT is an acronym for earnings before interest and taxes
What Is EBIT?
EBIT is an acronym for earnings before interest and taxes, and it is used to measure a company’s management of profitability. Just as its name implies, it is the amount of profit before interest expenses and tax payments are deducted. EBIT is also called profit before interest and taxes (PBIT), and is often used in lieu of operating income.
For companies that have more debt than equity in which interest costs can be high and for those that carry a high corporate tax rate, explaining income on an EBIT basis can be useful because it excludes those expenses. Executive management will sometimes say that despite their net income being low or at a loss, profit was high or the loss was narrower on an EBIT basis.
How to Calculate EBIT
EBIT can be calculated by using line items found in a company’s income statement, which is part of the financial statement filed quarterly and annually with the Securities and Exchange Commission.
While operating income is calculated top-down along a company’s income statement (revenue minus cost of goods sold and operating expenses), EBIT takes the bottom-up approach. From net income, which is referred to as the bottom line, the line items that appear higher—provisions for tax and interest costs—are added, and the sum should be equivalent to the company’s operating income.
There are instances in which a company’s EBIT isn’t the same as operating income because of costs or income that aren’t part of its normal, day-to-day operations. Non-operating expenses include former employees’ post-retirement benefits such as life insurance and medical plans, and gains and losses from foreign currency transactions. Or the company may have temporarily been involved in a deal that was outside of its normal business and needed to record that trade.
EBIT = Net Income + Interest Expenses + Tax Payments
In the table example for Colgate-Palmolive below, EBIT increased in 2020 from 2019 after slipping in 2019 from 2018. Its EBIT margin (explained in the following section) was above average. EBIT was not the same as its operating profit because non-service related postretirement costs were not part of the expenses of Colgate’s normal operations.
How Is EBIT Used?
EBIT can be used as a profitability ratio. Like operating margin, EBIT margin measures a company’s profit before interest costs and tax payments against sales. A 2015 report showed that for companies with a market capitalization of at least $1 billion, the average EBIT margin was 12 percent.
EBIT Margin Formula
EBIT Margin = EBIT / Revenue
What Are the Limitations of EBIT?
EBIT, as its name implies, doesn’t include interest expenses and tax payments, which otherwise might be helpful to evaluate the profitability of companies that are highly leveraged or have high tax payments.
Frequently Asked Questions (FAQ)
The following are answers to some of the most common questions investors ask about EBIT.
Can EBIT Be Negative?
Based on the way it is calculated, EBIT can be negative if net income is negative, which suggests that operating expenses and/or cost of goods sold exceeded revenue.
Is EBIT Different From Operating Income?
EBIT is another term for operating income, but the two are calculated in opposite directions: EBIT is calculated from the bottom up on the income statement starting with net income, while operating income is calculated from the top down from the top-line item, revenue.
Is EBIT the Same as Gross Profit?
EBIT is not the same as gross profit because operating expenses are not part of gross profit’s calculation.
What Is the Difference Between EBIT and EBITDA?
EBITDA is the acronym for earnings before interest, taxes, depreciation, and amortization, and is a variation of EBIT. Like EBIT, EBITDA excludes interest expenses and tax payments, but it also excludes costs for depreciation and amortization.
