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Earnings Before Interest And Taxes (EBIT)

Earnings Before Interest And Taxes (EBIT)

Earnings Before Interest And Taxes (EBIT) is an indicator of a company's profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.
There are several reasons why investors find EBIT so important when assessing a company's financial health.
  • First, because it excludes the impact of both tax payments and debt-servicing costs, it provides a more accurate picture of how much cash the business has available to reinvest in its operations or pay out to shareholders in the form of dividends or share buybacks.
  • Second, by measuring profitability on a pre-interest basis, it eliminates distortions created by fluctuations in borrowing costs.
For example, if a company's net income falls due to higher borrowing costs but its EBIT remains unchanged then we can say that its underlying business performance has actually improved. Finally, because EBIT excludes depreciation & amortization charges – which represent non-cash expenses – it gives us a truer indication of how much money the company is generating from its actual operations.
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