What Does EBIT Mean?

measuring incomeEBIT is an acronym derived from Earnings Before Interest and Taxes. It provides a way to measure how profitable a business is over a specific period of time, usually one year. The calculation to determine EBIT is:

EBIT = Operating Revenue  -  Operating Expenses (excluding tax and interest payments)

Commonly referred to as Operating Profit or Operating Income, EBIT focuses on the ability of a business to generate profit based on ongoing operations.

Operating revenue is money earned by a business from regular operations and does not include changes in inventory value or non-recurring sources of income. Operating Expenses refer to transactions generated by the everyday operations of a business and would not include expenses from discontinued or non-recurring activities.

There are many financial reports which provide information about a business and most are based on the generally accepted accounting principles (GAAP) of the United States. EBIT is a non-GAAP financial calculation which offers an alternative way to look at business transactions.  Non-GAAP classification does not indicate the practice is illegal or inaccurate; however, it does allow for more flexibility in what is and is not included in the calculation.

Business owners will need to look at the Profit & Loss Report or Income Statement to find the dollar amounts necessary to complete the EBIT calculation.

Income Statement

 Operating Revenue 48,600.00
 Non-recurring Income 732.50
 Total Income 49,332.50
 Operating Expenses 27,530.00
 EBIT $21,070.00
 Interest Expenses 3,500.00
 Tax Expenses 4,089.75
 Net Income $13,480.25

Using this example, EBIT is $21,070.00 (non-recurring income excluded) and Net Income (including interest and tax expenses) is $13,480.25.

From an investor’s point of view, EBIT levels the playing field and allows an apples-to-apples comparison between businesses with different tax structures and different financing methods within the same industry. This makes it easier to see how profitable a business is, regardless of their tax structure or interest payments on loans or other debt.

However, a business owner may be more interested in Net Income than EBIT, since that calculation includes all sources of income and expenses, providing a more complete financial picture.

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