What is EBIT? Definition, Formula & Example

EBIT – Definition

EBIT stands for Earnings Before Interest and Taxes. It is the net income of a company before paying the income taxes as well as interest expenses.

It is also referred to as operating earnings, operating profit, and profit before interest and taxes. Earings Before Interest & Taxes is the profitability measurement which is used to calculate the operating profits for a company.

It is a very useful metric used by Investors and creditors of a company. They use it know how successful the core operations of the company are and also the cost of the capital structure.

If an investor is thinking of buying a firm out, the existing capital structure is less important than the company’s earning potential.

This provides an insight to the investors to understand a company’s financial health and the ability to pay the external debt obligations.

Formula To Calculate EBIT?

Earnings before interest and taxes is an indicator of a company’s profitability. It can be calculated in different ways. You can use these 3 formulas to calculate Earnings Before Interest & Taxes:

OR

OR

Example for EBIT Calculation

Let us understand it with simple examples.

Example 1

Below Given are the important figures extracted from Company A’s financial statements:

• Revenue/Sales: Rs. 15,00,000/-
• Cost Of Production: Rs. 6,30,475/-
• Opening Stock: Rs. 4,04,525/-
• Closing Stock: Rs: 2,60,000/-
• Operating Expenses: 2,00,000/-

Applying the first formula:

Revenue – COGS – Operating Expenses

where

COGS = Total Cost of Production + Opening Stock – Closing Stock :

= 15,00,000 – (6,30,475 + 4,04,525 – 2,60,000) – 2,00,000

= 15,00,000 – 7,75,000 – 2,00,000

= 5,25,000

Example 2

• Revenue/Sales: Rs. 15,00,000/-
• Cost Of Goods Sold: Rs. 7,75,000/-
• Gross Profit: Rs. 7,25,000/-
• Operating Expenses: 2,00,00
• Income Taxes: Rs: 35,000/-
• Interest Expenses: Rs. 1,25,000/-
• Net Income: Rs. 3,65,000/-

Changing the scenarios, if we have the net income and other expenditures of the company we can calculate EBIT using the second formula Net Income + Interest + Income Taxes, the calcualtions will be as follows:

= 3,65,000 + 1,25,000 + 35,000

= 5,25,000/-

Example 3

• Net Income: Rs. 3,65,000/-
• Depriciation: Rs. 85,500 /-
• EBITDA: Rs. 4,40,000/-
• Income Taxes: Rs. 35,000/-
• Interest Expenses: Rs. 1,25,000/-

Now Applying the third formula EBITDA + Depreciation + Amortization:

= 4,40,000 + 85000 + 0

= 5,25,000/-

Thus, it is very easy to calculate EBIT using these formulas.

Click on the link below to download ready-to-use excel template to calculate EBIT per FTE:

EBIT Per FTE Calculator

In addition to the above, you can also download Excel templates in other categories like HR and Payroll, Financial Analysis, Financial Statements, etc

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