What is earnings before interest and tax (EBIT)?

Banking & FinanceFinance ManagementGrowth & Empowerment

Earnings before Interest and Tax (EBIT) tell about profitability of a company. It tells about company’s core operation performance. Companies profit includes incomes, expenses.

Sometimes EBIT is the amount which deducts all operating expenses from sales revenue, which is called operating income. EBIT is the amount generated in a particular accounting period.

Formulas

  • bases on TR, CGS, OE
    • EBIT = TR-CGS-OE

Here, TR = Total Revenue, CGS = Cost of Goods Sold, OE = Operating Expense

  • bases on NI, In, Ta
    • EBIT = NI+In+Ta

Here, NI = Net Income, In = interest and Ta = taxes

  • EBIT tells amount money earned by a company from its operations.
  • Investors can compare different tax situations using EBIT.
  • Investors can compare different companies with in sector.

Example

A manufacturer company has recorded following activities in their current income statement −

  • Sales (S) : Rs.955000/-
  • Cost of Goods Sold (CGS): Rs. 575000/-
  • Gross profit (GP): Rs. 426000/-
  • Operating Expense (OE): Rs. 175000/-
  • Interest expenses (IE): Rs. 55000/-
  • Income tax (IT): Rs.25000/-
  • Net income (NI): Rs. 125000/-

Solution

The solution is explained below −

  • bases on TR, CGS, OE
    • EBIT = TR-CGS-OE
    • EBIT = 955000 – 575000-175000
    • EBIT = 205000/-

Here, TR = Total Revenue, CGS = Cost of Goods Sold, OE = Operating Expense

  • bases on NI, In, Ta
    • EBIT = NI+In+Ta
    • EBIT = 125000+55000+25000
    • EBIT = 205000/-

Here, NI = Net Income, In = interest and Ta = taxes

raja
Published on 25-Sep-2020 14:18:43
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