Definition
The financial accounting term earnings before interest and taxes, or EBIT, is another name for operating income. Found in the company's income statement, earnings before interest and taxes are a measure of a company's ability to generate profits on an ongoing basis.
Calculation
Earnings Before Interest and Taxes = Revenue - Operating Expenses + Non-Operating Income
Explanation
As the name implies, income taxes and interest payments are excluded from this calculation of profitability. The measure also excludes income and expenses that are considered extraordinary, "unusual," one-time events, or costs and profits from discontinued operations.
Creditors are interested in metrics such as EBIT, since it's an indicator of the company's ability to generate enough cash to repay loans.
Example
Company A's income statement indicates revenues of $29,611,000, costs of goods sold of $15,693,000 and other operating expenses of $7,740,000. Company A did not have any discontinued operations, non-recurring events or extraordinary items. The earnings before interest and taxes are:
= $29,611,000 - $15,693,000 - $7,740,000, or $6,178,000
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorJanuary 22nd, 2024- The financial accounting term revenue is used to describe the price charged to customers for good sold, or services rendered. Revenues are reported on a company's income statement.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term operating expense is used to describe all of the costs associated with the ongoing operations of the company. Operating expenses appear on the company's income statement.Moneyzine EditorSeptember 20th, 2023
The term income tax is used to describe federal and state tax obligations payable on individual or business income. Income taxes are computed by completing tax forms available from the Internal Revenue Service.Moneyzine EditorJanuary 22nd, 2024
The financial accounting term interest expense is used to describe the interest payments that have come due on amounts borrowed by a company or an individual. Interest expense will appear as a line item on a company's income statement.Moneyzine EditorJanuary 22nd, 2024
The term investment tax credit refers to a number of business credits characteristically used by government entities to stimulate an economy. Typical credits include disaster relief, research and development, non-petroleum fuels, and alternative fuel vehicles.Moneyzine EditorJanuary 23rd, 2024
