accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...

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), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

that includes all incomes and expenses (operating and non-operating) except

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

expenses and

income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...

expenses. Operating income and operating profit are sometimes used as a

synonym A synonym is a word, morpheme, or phrase that means precisely or nearly the same as another word, morpheme, or phrase in a given language. For example, in the English language, the words ''begin'', ''start'', ''commence'', and ''initiate'' are a ...

for EBIT when a firm does not have

non-operating income Non-operating income, in accountancy, accounting and finance, is Gain (finance), gains or :wikt:loss, losses from sources not related to the typical activities of the business or organization. Non-operating income can include gains or losses fro ...

and non-operating expenses.

Formula

*EBIT = (net income) + interest + taxes =

EBITDA A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, state-mandat ...

– (depreciation and amortization expenses) *operating income = (

gross income For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes ...

) – OPEX = EBIT – (non-operating profit) + (non-operating expenses) where *EBITDA = earnings before interest, taxes, depreciation, and amortization *OPEX = operating expense

Overview

A professional investor contemplating a change to the

capital structure In corporate finance, capital structure refers to the mix of various forms of external funds, known as capital, used to finance a business. It consists of shareholders' equity, debt (borrowed funds), and preferred stock, and is detailed in the ...

of a firm (e.g., through a

leveraged buyout A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (Leverage (finance), leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of t ...

) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (

) 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) (also cost of products sold (COPS), or cost of sales) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific iden ...

, selling and administrative expenses) are subtracted from revenues.

Net income In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...

is later obtained by subtracting interest and taxes from the result.

Earnings before taxes

References

{{Reflist Fundamental analysis Profit

Formula

Overview

Earnings before taxes

See also

References