What is Earnings Before Interest and Taxes (EBIT)?
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:
For the year Ended Dec 31, 2xxx
|Earnings Before Interest and Taxes||$200,000|
|Earnings Before Income Taxes||$150,000|
|Income Tax Expense||$50,000|
In this example, EBIT is $200,000 while net income is $100,000.
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.