What Is EBIT
The ellipsis EBIT stands for earnings before interest and taxes. It’s an indicator of company’s profitability. It is calculated as revenue minus expenses excluding taxes and interest. Sometimes it is also called “operating profit” and “operating income”. It is calculated as follows:
EBIT = Revenue – operating expenses
It is also known as Profit before interest and taxes. EBIT is all profits before taking into account the interest and taxes payments. Calculating a company’s EBIT allows a person to know where the company stands in comparison to other competitors in the same industry. While calculating this resulting value is as same as the company’s operating costs, if the company does not have non operating costs.
It is common for investors to use the above equation for when comparing two or more companies, because it gives an insight to compare profitability of two or more companies in simple terms. Thus an investor comes to know which company is more profitable of the two or three, which company is a good choice for investment and whether or not a company can be made more profitable.
There are various advantages of EBIT which are as follows:
- Ability to compare companies that have different tax structure.
- Elimination of tax and interest are less likely to have an adverse effect.
- An investor can better understand how efficiently a company operates.
- It allows an investor to look into long term versus short term investments.
- It allows an investor to decide which company they can pursue in the long run.
Over the years this acronym was further extended as EBITD, which allowed even depreciation to be apart of it. In addition to taxes and interest, EBITD also excluded depreciation from calculation of earnings of a company. Depreciation is an expense in which the value of an asset is reduced over a period of time. This calculation allows us to more accurately the organization’s profitability or its cash flow. This formula gives very detail information to the stake holders.
Though EBIT and EBITD have been useful through the years, it also has certain disadvantages. It cannot be the only tool to decide the earnings of a company. It seems easy because of the easy formula but may lead to inaccurate information. For example the company may appear to be running profitably, but actually it may be incurring losses at the other end. This is because the EBIT formula takes into account only the recurring expenses excluding the expenses that are unusual or one time investment. One more disadvantage is that it does not include cost of capital.