Earnings before interest and taxes

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In accounting and finance, earnings before interest and taxes (EBIT), is a measure of a firm's profit that includes all expenses except interest and income tax expenses.^[1] It is the difference between operating revenues and operating expenses. When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.^[2]

EBIT = revenue – operating expenses (OPEX)

Operating income = revenue – operating expenses^[1]

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (EBITDA) and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative expenses) are subtracted from revenues.^[3] Net income is later obtained by subtracting interest and taxes from the result.

Example statement of income (figures in thousands)^[4]
Revenue
Sales revenue	$20,438
Operating expenses
Cost of goods sold	$7,943
Selling, general and administrative expenses	$8,172
Depreciation and amortization	$960
Other expenses	$138
Total operating expenses	$17,213
Operating profit	$3,225
Non-operating income	$130
Earnings before Interest and taxes (EBIT)	$3,355
Financial income	$45
Income before interest expense (IBIE)	$3,400
Financial expense	$190
Earnings before income taxes (EBT)	$3,210
Income taxes	$1,027
Net income	$2,183

Earnings before taxes

Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for taxes. EBT includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT (Earnings Before Interest and Taxes).

References

1 2 Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
↑ http://www.investorwords.com/3460/operating_income.html Operating income definition
↑ http://www.investorwords.com/1631/EBIT.html EBIT definition
↑ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.

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Earnings before interest and taxes

Earnings before taxes

See also

References