When investors want a clear picture of a company’s performance on a day-to-day basis, they turn to a time-tested metric called earnings before interest and taxes (EBIT). Using key data from an income statement, EBIT calculates the company’s operating profit, essentially revealing whether its sales can cover the everyday cost of doing business. While it’s far from the only formula that calculates a company’s financial performance, it’s one of the most important when evaluating operational efficiency.
Here’s a look at the EBIT formula, its use cases, and what it can reveal about your company’s operational profitability.
What is EBIT?
EBIT stands for earnings before interest and taxes. This fundamental financial metric shows how much a company earns from its business activities alone, without the influence of the company’s capital structure (debt) or the tax laws of its jurisdiction. Coupled with other financial metrics, a company’s EBIT shows its ability to produce an operating profit from its core operations. If the company’s operating income exceeds operating expenses, it will have a positive EBIT margin. In other words, it can turn a net profit before interest expenses and taxes come into play.
Why is EBIT important?
EBIT gives investors and analysts a clear view of a company’s operational performance. Stripping out interest and taxes allows for a more direct comparison of profitability between different companies in the same industry—even if they have different levels of debt or are located in different countries with varying tax rates. Investors and analysts scrutinize a company’s financial statements and carefully calculate EBIT to see how much profit the business produces.
A high EBIT means a company generates earnings providing its needed operating cash flow. It implies strong sales and cost management. By contrast, a low EBIT can raise questions about a company’s operational efficiency.
It’s important to note that EBIT calculations alone cannot offer a full picture of a company’s financial health. That’s because EBIT focuses solely on operating earnings and expenses; it does not account for tax expenses and interest payments, both of which could impact a company’s ability to stay solvent long term. For example, a business could enjoy a high EBIT due to a surge in sales, but when you factor in exorbitant financing costs, its financial metrics look more dubious.
How to calculate EBIT
To calculate EBIT, you need to gather several key figures from your income statement:
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Revenue (net sales). The business’s total income from selling goods or services.
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Cost of goods sold (COGS).COGS references the direct costs tied to producing goods, such as the materials and direct labor required in manufacturing.
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Operating expenses. These are the costs that a business incurs in its day-to-day operations, not directly related to producing goods. This can include administrative expenses, marketing costs, rent, utilities, and wages for other departments (e.g., marketing, customer service).
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Interest expenses. The cost of borrowing money, such as interest paid on loans or bonds.
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Tax expenses. The amount of money a company owes in income taxes to federal, state, and local governments.
The standard formula for EBIT can be written in a few different ways. The first shows earnings from a company’s core operations before factoring in financing costs or taxes:
EBIT = Revenue – Operating Expenses
Alternatively, writing the formula this way reverses the process of how net income is calculated on an income statement, effectively removing the non-operational expenses of interest and taxes:
EBIT = Net Income + Interest + Taxes
This last approach presents EBIT as the company’s operating income because it highlights earnings that come directly from a company’s core business operations:
EBIT = Revenue – Cost of Goods Sold – Operating Expenses
While each of these formulas has a different set of inputs, they should all produce the same sum.
Example of an EBIT calculation
In this example, we can use one dataset and perform the EBIT calculation in two different ways. First, we’ll start with our financial data:
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Net income: $50,000
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Interest expenses: $5,000
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Tax expenses: $15,000
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Revenue: $300,000
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COGS: $100,000
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Operating expenses: $130,000
Now we’ll apply these figures to our first EBIT formula:
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EBIT = Net Income + Interest Expense + Tax Expense
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EBIT = $50,000 + $5,000 + $15,000
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EBIT = $70,000
Next, we’ll apply the figures to the second EBIT formula:
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EBIT = Revenue – Cost of Goods Sold – Operating Expenses
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EBIT = $300,000 – $100,000 - $130,000
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EBIT = $70,000
In both cases, we end up with an EBIT of $70,000.
EBIT vs. EBITDA
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Calculate EBITDA by using the following formula:
EBITDA = EBIT + Depreciation + Amortization
Analysts use both EBIT and EBITDA to evaluate a company’s profitability from its core operations, but EBITDA goes one step further than EBIT by also adding back depreciation and amortization. Depreciation accounts for the wear and tear of tangible assets like machinery, while amortization accounts for the decline in value of intangible assets like patents. These are non-cash expenses, which means that on an income statement, they appear as deductions that aren’t linked to a physical cash outlay.
Adding depreciation and amortization expenses can make a company’s profitability look higher than what its EBIT suggests. This makes EBITDA a useful metric for comparing companies that have high levels of capital expenditures (e.g., a factory filled with machinery) or a great number of intangible assets (e.g., intellectual property, patents, copyrights).
EBIT vs. other profit metrics
EBIT and EBITDA are not the only formulas that factor into a corporate financial analysis. Here are some other prominent profit metrics to be aware of:
Gross profit
Gross profit is the revenue remaining after subtracting only the direct costs of producing goods—in other words, the COGS. It’s the first measure of a company’s profitability. EBIT includes overhead like wages and admin costs, whereas gross profit reflects only direct production costs. This means EBIT is always less than or equal to gross profit.
Net income
Net income, often called the “bottom line,” is the total profit a company generates after all expenses have been paid, including interest and taxes. EBIT, on the other hand, is always calculated before interest and taxes, making it a better measure of a company’s operational efficiency alone. Compared to EBIT, net income gives a more complete picture of the company’s final profitability, since interest and taxes are standard financial obligations that most companies must contend with.
Gross profit margin
Gross profit margin is a profitability ratio that shows gross profit as a percentage of total revenue. EBIT is a dollar amount, not a percentage; it provides a raw profit number. Gross profit margin, on the other hand, shows you how much of every dollar of sales a company keeps after covering its direct production costs.
Net profit margin
Net profit margin is a ratio that shows net income as a percentage of revenue. It is arguably the most comprehensive profitability ratio, as it measures the percentage of revenue left after all expenses, including interest and taxes, have been paid. Analysts will use your net profit margin to assess your company’s overall financial health, weighing your total expenses just as heavily as your profits.
Applications for EBIT
You leverage EBIT to get a clearer picture of a company’s profitability from its core business operations. This makes EBIT a valuable metric for both internal and external analysis. Here’s how it can be used in different scenarios:
Budgeting
EBIT provides a snapshot of a company’s operational efficiency without the noise of interest and taxes. By analyzing and projecting future EBIT, a business can create a realistic budget that reflects its ability to generate profit from its sales and cost structure. This helps a company decide how to allocate capital and fund future growth, whether that’s investing in fixed assets, hiring more workers, or expanding into new markets.
Evaluating management performance
Since EBIT excludes financing decisions and tax treatments, it gives a clear view of how well management is running day-to-day business operations. Comparing EBIT across financial quarters or between competitors may reveal how well a management team is deploying its company’s assets and controlling costs.
Attracting investors
Before committing capital to a business, investors may want to assess its future earnings capacity. EBIT is a useful metric for doing this, since it provides a starting point for understanding earnings independent of interest expenses (which may decline over time if the company thrives). It also helps investors directly compare a company’s revenue to that of its competitors.
EBIT meaning FAQ
What does EBIT tell you?
EBIT tells you how much profit a company generates from its core business operations, excluding the effects of interest and taxes.
How is EBIT calculated?
EBIT can be calculated in multiple ways. Three prominent formulas are:
- EBIT = Revenue – Operating Expenses
- EBIT = Net Income + Interest + Taxes
- EBIT = Revenue – Cost of Goods Sold - Operating Expenses
What is EBIT vs. EBITDA?
EBIT measures a company’s operating profit excluding interest and taxes, while EBITDA goes further by also excluding depreciation and amortization to reflect cash flow from core operations more directly.
