Short definition: Earnings before interest and taxes (EBIT) is a measure of a company’s operating profitability that shows its earnings before interest expenses and income taxes are deducted.
Explanation: EBIT is a key metric used to analyze a company’s ability to generate profits from its core operations, independent of its capital structure (debt) and tax obligations. It provides a clearer picture of a company’s operating performance compared to net income, which is affected by non-operating factors like interest and taxes.
Example: If a company has revenue of $1 million, operating expenses of $600,000, and interest expenses of $50,000, its EBIT would be $350,000 ($1,000,000 – $600,000 – $50,000).
Additional information (optional): EBIT is also known as operating income or operating profit. It is often used in financial ratios like the EBIT margin (EBIT/revenue), which measures a company’s operating profitability as a percentage of its revenue.
Meta description for the website (Glossary entry “Earnings Before Interest and Taxes”):
Learn about earnings before interest and taxes (EBIT) and its role in assessing a company’s operating profitability. Understand how EBIT is calculated and why it is an important financial metric for investors and analysts.