Earnings Before Interest and Taxes Definition – EBIT Example

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Earnings Before Interest and Taxes Definition & Example

Earnings Before Interest and Taxes Definition – It refers to the earnings of the corporation excluding interest and tax expense.

EBIT or Earnings before interest and taxes shows the net profit of a company after considering all the expenses except interest and tax. It is also known as profit before interest and taxes (PBIT) or operating profit. EBIT shows the organisations earnings from its operations.

The reason behind not taking interest and taxes is that these also includes factor other than operations. And EBIT reflects the earning of the business solely from its operations.

Formula

EBIT = Revenue – Operating Expenses

Or

EBIT = Net Income + Interest + Tax

Earnings Before Interest and Taxes Example

Let’s understand the earnings before interest and taxes definition with the help of a simple example-

 Revenue
Sales Revenue 20,000
Operating Expenses
Cost of goods sold8,000
Selling expenses4,000
Depreciation3,000
Total Operating expenses15000
Operating Profit5,000
Operating Income500
EBIT5,500

Related Financial Terms of Earnings Before Interest and Taxes

Importance of Earnings Before Interest and Taxes

EBIT is very helpful from the investors as well as creditors point of view. Both the parties want to know the performance of the company they have put their money. EBIT reflects the operation efficiency of the company without considering taxes and interest. This results in providing the exact measure of the business operational profitability. This tool is very important while  selecting the companies for investing purpose. However, EBIT provides true and fair results only if organization belonging to similar sector or industry.

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