- Earnings before interest and taxes
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Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow management · Chart of accounts · Journal · Special journals · Constant Item Purchasing Power Accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO & LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Statement of financial position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act Accounting qualifications CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · ACCA · CIA · CTP · ICAEW · CIMA · IPA · ICAN In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that excludes interest and income tax expenses.[1] Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.[2]
EBIT = Revenue – Operating expenses (OPEX) + Non-operating income
Operating income = Revenue – Operating expenses[1]
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 vs. equity.
To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[3] Profit is later obtained by subtracting interest and taxes from the result.
Statement of Income — Example
(figures in millions)Revenue Sales Revenue $20,438 Operating Expenses Cost of goods sold $7,943 Selling, general and administrative expenses $8,172 Depreciation and amortization $960 Other expenses $138 Total operating expenses $17,213 Operating income $3,225 Non-operating income $130 Earnings before Interest and Taxes (EBIT) $3,355 Net interest expense/income $145 Earnings before income taxes $3,210 Income taxes $1,027 Net Income $2,183 (Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)
See also
- Earnings Before Depreciation, Interest and Taxes - EBDIT
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs (EBITDAR)
- Financial Result
- Gross profit
- Net income per employee
- Net profit or Net income
- Operating profit
- Profit Before Interest, Depreciation & Taxes - PBDIT
- Revenue
References
- ^ a b Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
- ^ http://www.investorwords.com/3460/operating_income.html Operating income definition
- ^ http://www.investorwords.com/1631/EBIT.html EBIT definition
Categories:- Financial terminology
- Fundamental analysis
- Generally Accepted Accounting Principles
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