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In
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
and finance, earnings before interest and taxes (EBIT) is a measure of a firm's
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic ...
that includes all incomes and expenses (operating and non-operating) except
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
expenses and
income tax An income tax is a tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelate ...
expenses (for individuals). Operating income and operating profit are sometimes used as a
synonym A synonym is a word, morpheme A morpheme is the smallest meaningful lexical item in a language. A morpheme is not a word. The difference between a morpheme and a word is that a morpheme bound and free morphemes, sometimes does not stand alone ...
for EBIT when a firm does not have non-operating income and non-operating expenses.


Formula

: EBIT = Net income + Interest + Taxes =
EBITDA A company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members sha ...
– Depreciation and Amortization expenses :Operating income =
Gross income For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where wo ...
Operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (ca ...
s (OPEX) = EBIT – non-operating profit + non-operating expenses


Overview

A professional investor contemplating a change to the
capital structure Capital structure in corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and manag ...

capital structure
of a firm (e.g., through a
leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money (leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever *Leverag ...
) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (
EBITDA A company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members sha ...
) and EBIT), and then determines the optimal use of debt versus equity (equity value). To calculate EBIT, expenses (e.g. the
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortizatio ...
, selling and administrative expenses) are subtracted from revenues.
Net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
is later obtained by subtracting interest and taxes from the result.


Earnings before taxes

Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for
taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...

taxes
. EBT excludes the money paid for
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).


See also

* Earnings before interest, taxes, and amortization (EBITA) * Earnings before interest, taxes, and depreciation (EBITD) * Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) *
Earnings before interest, taxes, depreciation, and amortization A company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members sha ...
(EBITDA) * EV/EBITDA * Operating income before depreciation and amortization (OIBDA)


References

{{Reflist Fundamental analysis Profit