In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.[1] [2]
Operating income and operating profit are sometimes used as a synonym for EBIT when a firm does not have non-operating income and non-operating expenses.[3]
where
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 versus equity (equity value).
To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[4] Net income is later obtained by subtracting interest and taxes from the result.
| Revenue | ||
|---|---|---|
| Sales revenue | $20,438 | |
| Cost of goods sold | $7,943 | |
| Gross profit | $12,495 | |
| Operating expenses | ||
| Selling, general and administrative expenses | $8,172 | |
| Depreciation and amortization | $960 | |
| Other expenses | $138 | |
| Total operating expenses | $9,270 | |
| Operating profit | $3,225 | |
| Non-operating income | $130 | |
| Earnings before interest and taxes (EBIT) | $3,355 | |
| Financial income | $45 | |
| Income before interest expense (IBIE) | $3,400 | |
| Financial expense | $190 | |
| Earnings before income taxes (EBT) | $3,210 | |
| Income taxes | $1,027 | |
| Net income | $2,183 | |