How to Calculate EBIT – Earnings Before Interest and Taxes

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Earnings before interest and taxes (EBIT) is an important concept when analyzing the financial performance of a company. Learn why EBIT is useful for your business, how to calculate it, and how it differs from other financial performance indicators such as net income or EBITDA.

What is EBIT?

EBIT stands for “earnings before interest and taxes”. It measures the profitability of a company based on its core operations. EBIT is often referred to as operating profit, operating earnings, or profit before interest and taxes; however, it’s worth noting there can be circumstances where these metrics can differ from each other.

EBIT Formula

The formula for calculating EBIT is straightforward. You simply take net income and add back interest expense and taxes.

EBIT = Net income + Interest + Taxes

EBIT Formula

How to Calculate EBIT – Example

Pretend Company A had the following financial results in the most recent fiscal year:

  • Revenues: $1,000,000
  • Cost of goods sold (COGS): $600,000
  • Operating Expenses: $200,000
  • Interest Expense: $50,000
  • Taxes: $40,000

In order to calculate EBIT, you must first find Company A’s net income. In this particular scenario, you can find net income by taking revenues and subtracting COGS, operating expenses, interest expense, and taxes from it.

Net income = $1,000,000 – $600,000 – $200,000 – $50,000 – $40,000

Net income = $110,000

As stated above, the formula to find EBIT is net income + interest + taxes. To calculate EBIT you would take net income of $110,000 and add back interest expense of $50,000 and taxes of $40,000.

EBIT = $110,000 + $50,000 + $40,000

EBIT = $200,000

It’s that easy! Although an incredibly simple calculation, its very important to know when running a business. In this example, another way of calculating EBIT would be to subtract COGS and operating expenses from revenues – either way you would end up with $200,000.

EBIT vs. EBITDA

EBIT and EBITDA are very similar, but have one key difference. The formula for EBITDA includes depreciation and amortization. See how the formulas differ from each other below:

EBIT = Net income + Interest + Taxes

EBITDA = Net income + Interest + Taxes + Depreciation + Amortization

EBIT stands for “Earnings before interest and taxes” whereas EBITDA stands for “Earnings before interest, taxes, depreciation, and amortization”.

Net Income vs. EBIT

Net income and EBIT are similar, however, EBIT is typically a larger number because it doesn’t take into account interest expense or taxes.

Understanding the 3 Segments of EBIT

When learning how to calculate EBIT, there are 3 main segments you should know:

  1. Earnings: Also known net income, earnings refer to the amount of income generated by a company. It is calculated by subtracting operating expenses from total revenue.
  2. Interest: Many businesses will borrow money to finance assets such as real estate or equipment. The business will then make payments to the lender which will include principal (reduces loan balance) and interest (how the lender makes money).
  3. Taxes: Taxes are a percentage of the income generated by a business that is paid to the government. Taxes are not included in the EBIT calculation because tax expenses don’t accurately reflect the performance of a business.

Conclusion

EBIT is a metric used in a wide variety of finance professions, including commercial lending and corporate finance. If analyzed properly, EBIT can be very useful to your business.