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EBIT definition

Description

EBIT is a metric measure that is calculated by adding net income to interest and income taxes. EBIT is a very popular and often used financial profitability measure. Data to calculate this ratio is collected from the income statement. EBIT is also referred to as operating earnings, operating profit or operating income because this measure shows company’s profit which mostly evaluates operating cost.

In other words, EBIT is a sum of all profits before taking into account interest payments and income taxes. This measure must be considered both by owners, creditors and investors as it shows income from operating activities. EBIT is especially valuable while comparing companies with different financing sources. In other words, we can compare companies with the different capital structure.

Norms and limitations

Higher value of EBIT indicates better state of the company. However EBIT is not a relative ratio.

EBIT is a metric measure that will not indicate how efficiently assets and resources are used.

Formula

Net income (net profit, net earnings) usually called “the bottom line” is a measure which is calculated by taking revenues (sales and other incomes) and adjusting for the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Interest expense shows how much a company must pay for the money they borrowed from banks and other creditors.

A tax is a measure that governments impose on financial income generated by all entities within their jurisdiction.