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.
EBIT = Revenue – Operating Expenses
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-
|Cost of goods sold||8,000|
|Total Operating expenses||15000|
Related Financial Terms of Earnings Before Interest and Taxes
- Return on Sales Definition – ROS Meaning, Example & Importance
- Retained Earnings Definition, Formula and Importance
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.