EBIT Calculator

What is EBIT?

Earnings Before Interest and Taxes is a fundamental metric of company profitability. It's widely used due to its simplicity and accuracy. It can usually be found on a company's income statement and could be referred to as operating profit, operating income, or profit before interest and taxes.

To calculate EBIT, you must subtract operating expenses from the company's revenue. Income tax and interest should not be deducted, as the name suggests.

• EBIT can also be called operating profit
• EBIT gives information about the company's earnings 
• Income taxes and interests do not impact EBIT

EBIT Formula

There are two methods for calculating EBIT value.

EBIT can be calculated by subtracting costs of goods sold (COGS) and other operating expenses from the revenue.

EBIT = revenue - COGS - operation_expenses

Other methods can be derived directly from the definition. Since EBIT is the equivalent of earnings before interest and taxes, you can find EBIT by adding interest and taxes to the net income. So, the EBIT equation may look like this:

EBIT = net_income + interest + taxes

How to calculate EBIT?

Once we know the formula for EBIT, let's analyze a simple example of some hypothetical retail company. 

Step 1. Find the total revenue on the income statement.

Each company presents such information at the end of every fiscal year.

Step 2. Subtract the costs of goods sold.

In the case of retail companies, COGS is simply the purchase costs of all products the company sells in a given period.

Step 3. Subtract the operating profits

Operating profits may include employee salaries, rental costs, advertising expenses, etc. It's important to remember to skip interest and tax expenses. 

Applications of EBIT

Earnings Before Interest and Taxes is a simple yet handy indicator that carries much helpful information. Experienced investors use it as a part of their analysis. 

EBIT can be used to evaluate a company's profitability

EBIT is a market standard for analyzing the profitability of enterprises with a focus on the efficiency of their operating activities. Companies may use debt as leverage for growth, and interest payments may decrease their current net income. For such companies, net income analysis may undermine the profitability of day-to-day business operations. 

Since the interest payments are temporary and after they are paid off, the company may expect an increase in net income - EBIT gives a better overview of the company's current performance. 

EBIT may be used to compare companies

Every company may have a different strategy. Some focus on rapid growth using debt, while others grow organically. 

What's more, companies may operate in different environments. For example, foreign tax jurisdictions may have different interest rate levels. 

By omitting income taxes and interests from business analysis, EBIT allows a comparison of the operational efficiency of companies from different countries where tax rates and interest rates may vary.

Moreover, some companies may have better net income due to tax optimization and not because of better utilization of the available resources. In such cases, comparing EBIT values may reveal which company has higher operating efficiency and is under better management. 

Profitability metrics that use EBIT

Earnings Before Interest and Taxes carries a lot of helpful information. However, a business analysis will not be complete if you focus solely on one metric. 

That's why other metrics use EBIT as a component of more complex analysis that reveals more detailed information about the business. For more information, visit our ROCE calculator or ROIC calculator.

Advantages of EBIT Over Other Metrics:

EBIT allows you to see how well a company is doing with its main business. It's different from other ways people look at a company's money. Here's why many like to use this financial indicator instead of other methods:

Clear Focus on Operating Activities

Unlike other metrics, EBIT provides a direct view of the profitability of a company's core operations by sidelining non-operating items such as interest and income tax expenses. This clarity allows stakeholders to precisely gauge how well the main business activities are performing.

Simplicity and Widespread Usage

Due to its straightforward nature, EBIT is easy to compute, especially with tools like an online EBIT calculator. Its popularity means it's widely recognized and used, making it easier to communicate and compare across industries and markets.

Bypassing Financial Structure Variances

By excluding interest, EBIT ensures that a company's financing decisions do not influence the profitability measure. This makes EBIT an effective tool to compare companies with varying debt structures.

Exclusion of Tax Inefficiencies

EBIT omits income tax expenses. This is a key advantage when comparing businesses across different tax jurisdictions or evaluating companies with variable tax management efficiencies.

Comparative Advantage Over EBITDA

While EBITDA excludes interest and income tax expenses, depreciation, and amortization, EBIT only excludes interest and income tax. This means EBIT can offer a more realistic representation of a company's operational performance as it considers the cost of tangible assets through depreciation.

Clearer Than Gross Profit

Gross profit focuses solely on direct production costs and does not consider other operating expenses. In contrast, EBIT provides a broader view by including all operational costs, offering a more comprehensive look at operational profitability.

EBIT Margin Gives A Clear Picture

EBIT margin, a derivative of EBIT, is a percentage that represents the operating profitability. It's a more refined metric that gives stakeholders a clearer understanding of how much of every dollar in sales translates to operating profit.

Easier Isolation of Non-operating Items

With EBIT, it becomes simpler to identify and isolate non-operating items that don't directly relate to a company's core business activities. This clear differentiation can aid in more refined financial analysis.

Flexibility in Use

EBIT provides a foundational metric upon which other metrics can be derived. For instance, tools like the EBIT Calculator can be extended to derive metrics like EBIT Margin or others that offer deeper insights.

The nature of EBIT allows stakeholders to quickly differentiate it from other metrics, ensuring that there's minimal confusion when analyzing financial statements. While many financial metrics offer insights into the health and profitability of a company, EBIT, with its specific focus on operational performance and its exclusion of interest and income tax expenses, stands out as a robust tool for analysts, investors, and business owners.

Limitations of EBIT

Although EBIT has its advantages, it has its limits too. Understanding EBIT constraints allows us to avoid mistakes and drive to the wrong conclusions. Below, we describe a few aspects that need to be considered while analyzing the company's financial statement.

Debt

As we mentioned earlier, omitting the interest expense by the EBIT allows a better overview of the company's operating efficiency. However, if the management was over-indebted or the interest rates went sharply up, the debt may limit the company's growth, cash flow, and profitability. In such cases, relying solely on EBIT may be misleading. 
For more information visit our cash flow to debt calculator.

Depreciation and amortization

Companies with many fixed asset depreciation expenses negatively impact the net income. For such companies, comparisons with companies with different situations by just analyzing EBIT will not reveal helpful information. 

Taxes

Since taxes are not part of the EBIT equation, comparison of companies that are under different tax jurisdictions with high differences in tax rates is difficult too. Tax rates don't change often, and if they are too high, they may permanently undermine a company's efficiency in opposition to those with low tax obligations. Companies with higher EBIT may permanently bring lower net profits.

Example EBIT calculation

How to find EBIT?

In order to better illustrate how to calculate EBIT, let's perform a real-life calculation. Below, we will calculate the earnings before interest and taxes of Tesla Inc. for the fiscal year 2021. The data for the analysis is from the income statement (source). 

Let’s put the following data into the EBIT formula. 

EBIT = revenue - COGS - operation_expenses = $53,823 - $40,217 - $7,110 = $6,496

EBIT of Tesla Inc. (TSLA) for fiscal year 2021 equals $6,496,000,000. Notice that EBIT is always lower than gross income and higher than net income.

Role of EBIT in Investment Decisions

Earnings Before Interest and Taxes is a key figure on the income statement that guides investors. Here's why:

1. Snapshot of Core Business: EBIT, also known as operating profit, reveals the money a company makes from its main activities by focusing on income and expenses without getting sidetracked by taxes and loans.

2. Easy Calculation: To calculate Earnings Before Interest and Taxes, investors simply subtract operating costs from total revenue or use our EBIT calculator.

3. Clear Financial Picture: By overlooking the deduction of taxes and interest, EBIT offers a clean view of a company's financial performance, showing how well the business does at its heart.

4. Comparative Tool: EBIT is great for comparing businesses. Whether it's looking at two companies or understanding differences like EBIT vs. EBITDA, EBIT provides a consistent metric.

Related tools

If you are looking for alternative ways of evaluating a company, visit our EVA calculator. 

EBIT is essential in calculating the Degree of Operating Leverage, a popular metric measuring the sensitivity of a company's profitability to changes in sales.

Authors

Created by Lucas Krysiak on 2022-04-13 18:50:47 | Last review by Mike Kozminsky on 2024-02-11 12:04:30