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EBIT

 

EBIT (also called Earnings Before Interest and Taxes) is a financial indicator of the company that provides information about company’s profitability while ignoring the impact of capital structure and corporate income tax.

 

EBIT is very similar to operating income; however there are some differences despite the fact that those terms sometimes are used as synonyms and are very similar. But EBIT and operating income should be different if company has non-operating income when that income is at the same time non-financial. In that case operating income could be more effective indicator for comparison.

 

Often EBIT is used together with EBITDA. EBITDA differs from EBIT by depreciation and amortization and normally is higher and more stable. Still, EBIT is a better ratio than EBITDA for profitability measurement of construction companies.

 

EBIT calculation


(1)  EBIT = Gross income* – Operating expenses + other non-financial income – other non-financial expenses


(2) EBIT = Pre-tax profit** + Financial expenses – Financial income


* Gross income (gross profit) = Revenue – Cost of sales (COGS)


** Pre-tax profit (profit before tax) = Net income (net profit) + Corporate income tax


*** Different companies have different accounting standards and may have different income statement structure, so you have to be sure that are getting correct value. EBIT may be calculated for any period for which income data are available.

 

**** (1) and (2) formulas are different methods of calculation (top-down or bottom-up) but you should get the same result using both methods.

 

EBIT interpretation 

 

The higher is EBIT and EBIT margin the better is for the company because it achieves better returns for the shareholders. Whole business is about making the profit, and EBIT is just one type of profit measurement. However, EBIT has gained its popularity together with EBITDA and both of these ratios are informative and convenient to use. 

 

Yet EBIT does not say much until is not compared correctly. The best way to track EBIT is to track revenue and operating margin (which is almost the same as EBIT margin) separately. 

 

 






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