Earnings before interest and taxes (EBIT) is number that shows company profitability. EBIT is the company net income (or profit) before paying interests and taxes. It is very similar to operating income and sometimes is used interchangeably. EBIT excludes taxes and interest expense on purpose in order to focuses mainly on the company’s ability to generate earnings from operations.
There are few ways of arriving at companies EBIT number. The first one is by simply adding the interest and taxes expenses back to the net income number:
EBIT = Net Income + Interest + Taxes
The other way of estimating at the EBIT number is by subtracting from the revenue the Costs of Goods Sold (COGS) number and all the operating expenses:
EBIT = Revenue − COGS − Operating Expenses
EBIT is useful when evaluating business as it tells the investors how much profit can a business generate from its operations. EBIT is used by investors as it slows them to evaluate similar companies (in the same or similar industries) with different tax rates. Is is also more preferred method of assessing profitability of a business that is industry that are capital intensive and have a lot to fixed assets. Unlike EBITDA, EBIT does not exclude appreciation and deprecation form itself and therefore gives more realistic picture of the operating profitability of the business. It does, however exclude the interest expense that for companies with a lot of debt might be a significant portion of their cost.