What is Earnings Before Interest and Taxes (EBIT)?
Earnings Before Interest and Taxes (EBIT) measures the profitability of a company without taking into account its cost of capital or tax implications.
How Does Earnings Before Interest and Taxes (EBIT) Work?
EBIT is calculated using information provided on a company’s income statement.
Using company XYZ as our example,
Income Statement
For the year Ended Dec 31, 2xxx
| Sales Revenue | $1,000,00 |
| Other Expenses | $800,000 |
| Earnings Before Interest and Taxes | $200,000 |
| Interest Expenses | $50,000 |
| Earnings Before Income Taxes | $150,000 |
| Income Tax Expense | $50,000 |
| Net Income | $100,000 |
In this example, EBIT is $200,000 while net income is $100,000.
[InvestingAnswers Feature: The Most Important Tax Changes to Know Before Filing Your Tax Return]
Why Does Earnings Before Interest and Taxes (EBIT) Matter?
EBIT provides investment analysts with useful information for evaluating a company’s operating performance without regard to interest expenses or tax rates. EBIT helps minimize these two variables that may be unique from company to company, and enables one to analyze operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry where those companies may have varying capital structures or tax environments.
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