EBIT
Earnings Before Interest and Taxes — a measure of a company's profitability from core operations, excluding the effects of financing decisions and tax rates.
Example
“The company's EBIT of $50M showed strong operational performance regardless of how it was financed.”
Memory Tip
EBIT = operating profit before interest and taxes. Focuses purely on the business operations.
Why It Matters
EBIT helps you understand how well a company actually runs its core business without the noise from debt levels or tax situations. When comparing companies or evaluating an investment, EBIT strips away financial and tax differences so you can see which business is truly more profitable at what it does.
Common Misconception
Many people think EBIT is the same as net income or profit, but EBIT actually excludes interest paid on debt and taxes owed. Net income is what remains after both of these are subtracted, so EBIT is always higher than what a company actually gets to keep.
In Practice
Company A reports revenue of 10 million dollars with operating expenses of 6 million dollars, giving an EBIT of 4 million dollars. However, after paying 1 million in interest on loans and 750,000 in taxes, the actual net income is only 2.25 million dollars. This shows why EBIT matters: it reveals the 4 million dollar operating strength even though shareholders only see 2.25 million in profits.
Etymology
Acronym for Earnings Before Interest and Taxes. Strips out financing costs (interest) and jurisdiction-based taxes.
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
Other accounting terms you should know
See Also
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