Earnings Before Interest and Taxes: How To Calculate EBIT (With Examples)

By Indeed Editorial Team

Updated November 16, 2021 | Published April 14, 2020

Updated November 16, 2021

Published April 14, 2020

Calculating earnings before interest and taxes, or EBIT, is one important way of measuring a business' value. EBIT is a useful tool for comparing the profitability of multiple companies. In this article, we define EBIT and demonstrate how to calculate it with examples.

Related: How Analyzing Data Can Improve Decision-Making

What is EBIT?

EBIT, or earnings before interest and taxes, is a measurement of a company's profitability directly related to its sales. EBIT answers the question of whether a company makes a profit from selling its merchandise. Other profitability metrics look at net profit, or the profit after expenses have been paid. EBIT measures profit before interest and tax factors have been subtracted. This demonstrates whether a company is profitable or not despite the amount it pays in taxes or how much debt the company owes.

EBIT is also known as operating income or operating profit, particularly for companies that do not have non-operating income or non-operating expenses.

Related: Why EBITDA Is Important for a Business (With Example)

How to calculate EBIT

There are two ways to calculate EBIT, but each one is useful at a different time in the fiscal year. One way factors in total revenue; the other, net income.

The specific EBIT formula to use depends on what information is available. If you want to determine EBIT using the yearly income statement, applying the net income formula may be the easiest course to take. If it is the middle of the fiscal year and the income statement does not yet accurately and fully represent earnings, using the total revenue formula will give you the most up-to-date EBIT.

Here are the two ways to express EBIT:

  • EBIT = Total revenue - Cost of goods sold - Operating expenses

  • EBIT = Net income + Taxes + Interest

Related: A Definitive Guide To Net Operating Profit After Tax

How to calculate EBIT using total revenue

The total revenue EBIT calculation is useful for preliminary or mid-year assessments of profitability:

1. Determine total revenue

The first step is to establish total revenue, which you can find on the income statement. This is the document that lists a business' revenue and costs over a period of time, such as a fiscal quarter or year. This number may be listed as total revenue or sales revenue depending on the type of business and the structure of the income statement.

2. Calculate cost of goods sold

The cost of goods sold is the total cost of materials, labor and production that goes into a company's merchandise. To determine the cost of goods sold, add the cost of the beginning inventory to any additional inventory purchased over time. Then, subtract any sold inventory.

3. Establish operating expenses

Operating expenses are any business costs related to day-to-day company operations. Operating expenses do not include costs tied directly to production. This figure also can be found on the income statement. Often, operating expenses will be itemized into categories, such as rent and wages.

4. Calculate EBIT

To find EBIT, subtract the cost of goods sold and operating expenses from the total revenue.

Example: The company Tractors and More wants to see what their earnings are in the middle of the fiscal year. First, they find their current total revenue, which is $35,000. Then, they figure out the cost of goods sold. At the beginning of the fiscal year, they purchased 75 tractors. A month ago, they purchased 20 more. They have sold a total of 70 tractors. Their tractors cost $500 each, so their remaining inventory is worth $12,500. Using their income statement, Tractors and More finds that their total operating expenses for wages, warehouse and utilities are $5,000. To find EBIT, they subtract $12,500 and $5,000 from $35,000. Their EBIT is $17,500.

EBIT = (total revenue) - (cost of goods sold) - (operating expenses)
EBIT = ($35,000) - ($12,500) - ($5,000)
EBIT = $17,500

Related: EBIT vs. EBITDA: Definitions, Differences and Examples

How to calculate EBIT using net income

The net income EBIT calculation is helpful for year-end profitability measurements:

  1. Determine net income. You can find net income on the bottom line of your income statement.

  2. Calculate interest and taxes. Interest and taxes each will be listed separately on the income statement in the expenses category.

  3. Find EBIT. Add together the net income, interest and taxes to calculate the EBIT.

Example: It is the start of a new fiscal year. Danny's DanceWear wants to find their EBIT using last year's income statement. Danny's DanceWear's net income was $56,780. They paid $2,000 in interest and $4,000 in taxes. To find EBIT, they add $56,780 to $2,000 and $4,000. Danny's DanceWear's EBIT is $62,780.

EBIT = Net income + Taxes + Interest
EBIT = $56,780 + $4,000 + $2,000
EBIT = $62,780

Related: What Is EBITDA and Why Is It an Important Financial Tool?

Limitations of EBIT

Assessing EBIT is not always the best way to compare companies. For example:

A potential investor is comparing two companies. The companies have similar EBITs. The first company's debt is due to the purchase of a new building. The second company's debt is due to overextending production with little consumer demand. Since EBIT removes the interest both companies pay, it would be hard for the potential investor to accurately gauge which company is a safer investment.

Difference between EBIT and EBITDA

Earnings before interest, taxes, depreciation and amortization (EBITDA) is another measure of base profitability, but with two noticeable differences from EBIT:

  • Depreciation: the decrease in value of an asset over its lifespan.

  • Amortization: the process of paying off the principal and interest on a loan at regular intervals, or the process of accounting for the initial cost of an asset over time.

EBITDA is a useful measurement for companies that have expensive assets they do not want to account for all at once.

EBITDA is often used to compare one company's profitability to another company's profitability, which is a useful tool for companies that want to purchase businesses. It shows the purchaser how profitable a company is apart from its debt and asset depreciation, which the purchasing company may be able to pay off or refinance.

EBIT is more frequently used as a stand-alone performance metric for an individual company. EBIT demonstrates how a company's core operations perform with the exclusion of tax and interest deductions.

EBIT and debt

EBIT helps businesses that have fixed assets—or large purchases like land and equipment—demonstrate their true earnings without accounting for the debt associated with those fixed assets. While a company with fixed assets may appear to have a poor debt-to-income ratio on its balance sheet, such fixed assets are often long-term investments that do not impact the company's profitability. EBIT calculations demonstrate the company’s profitability without accounting for those fixed assets.

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