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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings Before Interest After Taxes (EBIAT)

What it is:

Earnings before interest after taxes (EBIAT) is a measure of a company's operating performance. EBIAT is a measure of how profitable a company would be if it paid taxes on its operating profit without the benefit of the tax shelter that is created by using debt.

How it works (Example):

Essentially, EBIAT gives analysts a way to evaluate a company's profitability without factoring in the way the company is financed (i.e. the proportion of debt to equity), but taking into account that taxes could be considered an ongoing expense of doing business.

EBIAT is calculated using the company’s income statement.  It is not included as a line item, but can be easily derived. Let's take a look at a hypothetical income statement:

EBIAT = EBIT * (1 - Tax Rate)

To calculate EBIAT, we use the formula above:

EBIAT = 750,000 * (1 - 100,000/700,000) = 642,857

Why it Matters:

EBIAT is not as widely used as its cousin, EBITDA.

That being said, EBIAT is useful for analysts who wish to look at a firm's performance while accounting for the tax environment in which it operates. Unlike financing decisions, over which companies have direct control, tax rates are set by the government of the country in which a company operates, and are not under the company's control. So by using EBIAT, the analyst treats taxes as an operating cost (i.e. as a cost of doing business) because if a company doesn't pay taxes, it will not be allowed to operate.

By minimizing the financing effects that are unique to each company, EBIAT allows investors to focus on operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry, as long as they operate in the same tax environment.

When analyzing a firm's EBIAT, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments, and, of course, net income.

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