Different metrics help business owners and stakeholders quickly determine the financial health of their organization. EBIT is one of these metrics.
What does EBIT stand for?
Commonly referred to as Operating Profit or Operating Income, EBIT 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 formula for how to calculate EBIT is:
EBIT = Operating Revenue – Operating Expenses (excluding tax and interest payments)
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.
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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Post updated from 9/12/2012 to include examples and related material.