Earnings before interest and taxes
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In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that excludes interest and income tax expenses.[1] Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.[2]
EBIT = Revenue – Operating expenses (OPEX) + Non-operating income
Operating income = Revenue – Operating expenses[1]
A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA and EBIT), and then determines the optimal use of debt vs. equity.
To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[3] Profit is later obtained by subtracting interest and taxes from the result.
| Statement of Income — Example (figures in thousands) |
|
| Revenue | |
| Sales Revenue | $20,438 |
| Operating Expenses | |
| Cost of goods sold | $7,943 |
| Selling, general and administrative expenses | $8,172 |
| Depreciation and amortization | $960 |
| Other expenses | $138 |
| Total operating expenses | $17,213 |
| Operating income | $3,225 |
| Non-operating income | $130 |
| Earnings before Interest and Taxes (EBIT) | $3,355 |
| Net interest expense/income | $145 |
| Earnings before income taxes | $3,210 |
| Income taxes | $1,027 |
| Net Income | $2,183 |
(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)
See also
- Earnings before depreciation, interest, and taxes (EBDIT)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR)
- Financial result
- Gross profit
- Net income per employee
- Net profit or Net income
- Operating profit
- Profit before interest, depreciation, and taxes (PBDIT)
- Revenue
References
- ^ a b Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
- ^ http://www.investorwords.com/3460/operating_income.html Operating income definition
- ^ http://www.investorwords.com/1631/EBIT.html EBIT definition