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In accounting and finance, earnings before interest and taxes (EBIT), is a measure of a firm's profit that excludes interest and income tax expenses. 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.
Operating income = Revenue – Operating expenses
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. Profit is later obtained by subtracting interest and taxes from the result.
|Statement of Income — Example|
(figures in thousands)
|Cost of goods sold||$7,943|
|Selling, general and administrative expenses||$8,172|
|Depreciation and amortization||$960|
|Total operating expenses||$17,213|
|Earnings before Interest and Taxes (EBIT)||$3,355|
|Income before Interest Expense (IBIE)||$3,400|
|Earnings before income taxes||$3,210|
(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)