Profitability and Coverage Analysis
2.6. Earnings before interest and taxes (EBIT)
Earnings before interest and taxes (EBIT) is an indicator of a company’s profitability before interest and income tax expenses. EBIT equals revenues minus cost of goods sold minus operating expenses plus non-operating income.
If the company does not have non-operating income, EBIT is also called operating profit because EBIT then shows a company’s earnings from ordinary operations.
EBIT may be helpful in analyzing profitability when the impact of capital structures and income tax rates should be eliminated. EBIT helps accomplish this because it excludes interest expenses (e.g., capital structure) and income taxes (e.g., income tax rates).
Earnings before Interest and Taxes (EBIT) Formula
EBIT = Revenue – Cost of Goods Sold – Operating Expenses + Non-operating Income |
Alternatively, the following formula can be used when non-operating income equals zero:
EBIT = Operating Profit = Revenue – Cost of Goods Sold – Operating Expenses |
Earnings before Interest and Taxes (EBIT) Example
Let’s return to our example of Friends Corporation. EBIT for fiscal year 20X9 was:
EBIT = $14,000 – $8,500 – $1,220 + $160 = $4,440
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