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Earnings before interest and taxes
From Wikipedia, the free encyclopedia
In financial and business accounting, earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses.[1]
EBIT = Operating Revenue – Operating Expenses(OPEX) + Non-operating Income
Operating Income = Operating Revenue – Operating Expenses[2]
Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[3] This is true if the firm has no nonoperating income.
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 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.[4] Profit is later obtained by subtracting interest and taxes from the result.
| Statement of Income — Example (figures in millions) |
|
| Operating Revenues | |
| Net Sales | $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 |
| Nonoperating income | $130 |
| Earnings before interest and income taxes (EBIT) | $3,355 |
| Net interest expense | $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.
- ^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0 07 251077 3
- ^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.
- ^ http://www.investorwords.com/3460/operating_income.html Operating income definition
- ^ http://www.investorwords.com/1631/EBIT.html EBIT definition